Denial of KKC credit to be transitioned into GST

This is to update you on a recent Advance Ruling issued by the Authority for Advance Ruling (Maharashtra) wherein it has been held that the accumulated credit by way of Krishi Kalyan cess (KKC) as appearing in the Service tax return of Input service distributor (ISD) on June 30 2017 cannot be carried forward in the electronic credit ledger maintained under GST.  

The key highlights of the Ruling has been provided hereunder for your reference:-

►    The applicant apart from centralized registration also has a separate registration as ISD for its Head office to distribute the eligible CENVAT credit to its factories and head office as per Cenvat Credit Rules 2004 (CCR Rules).

►    As an ISD, the company received CENVAT credit at head office. Those CENVAT credit also included KKC as well but the company could not distribute KKC to its factories because KKC credit could be utilized only with KKC liabilities as prescribed under CCR and recipient entities being manufacturing entities did not have any KKC liability. As a result KKC credit got accumulated in the ISD service tax return.

►    In view of the provision of section 140(1) of CGST Act 2017, read with rule 117(1) of CGST Rules 2017, the company had carried forward aforesaid accumulated KKC to its e-credit ledger maintained under GST but the same was not utilized.

Applicant’s view point and submissions:-

►    KKC is levied as per section 161 of the Finance Act 2016 specifying that for levy and collection of KKC, chapter V of Finance Act 1994 (service tax).

►    Entry 92C of Union list 1 of Indian Constitution empowers legislature to levy service tax as provided under chapter V of Finance Act 1994. 122^nd amendment of constitution deletes entry 92C of Union List for implementing GST.

►    Hence it implies that KKC is also subsumed in GST along with service tax and Rule 3(1)(a) of CCR includes KKC as Cenvat Credit.

►    Since section 140(1) allows a registered person to carry forward the CENVAT credit in return to electronic credit ledger. So KKC credit will also be considered as admissible CENVAT credit as per proviso to section 140(1) of CGST Act.

Authority’s view point and contentions:-

►    By referring to the various provisions and notifications which was issued time to time by the government, advance ruling authority was of the view that KKC would be utilized towards payment of KKC only. Further it was expressly provided that the list of items in respect of which CENVAT credit is available, as enumerated in the CCR, would not utilized for the payment of KKC.

►    AAR also referred to a judgement passed in the matter of Cellular operators association of India Vs. UOI, wherein Delhi high court held that education cess and secondary higher education cess were in the nature of taxes and not fees and it is improper to treat the two cesses as excise duty or service tax and hence EC and SHEC shall not be utilized for payment of service tax or excise duty.

►    Authority has also referred to the input tax credit definition as given in section 2(62) of CGST Act 2017 wherein the definition does not include any cess and hence apparently KKC should not be allowed.

TBM Comments:-

►    While the above ruling has been pronounced by Maharashtra AAR- it should typically be applicable to the specific applicant in the state of Maharastra.

►    Further the above ruling dealt with the ISD registration and the transition of the credit accumulated in the ISD return. The issue of disallowance of KKC credit to be taken into GST has been addressed by way of the above ruling.