Madras HC allows transitional credit of EC, SHEC and KKC under GST

This Tax Alert summarizes a recent ruling of Madras High Court (HC)¹. The issue relates to transition of accumulated credit of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) into Goods and Services Tax (GST). 

The petitioner contended that section 140(1) of the Central Goods and Services Tax Act, 2017 (CGST Act) uses the expression “CENVAT credit”, which shall have the same meaning as assigned to it in the Central Excise Act, 1944 or rules made thereunder. Thus, EC, SHEC and KKC are ‘credits’ and would be eligible for transition.  

Revenue contended that the scheme of section 140 nowhere provides for transition of EC, SHEC and KKC. With abolition of such cesses under the erstwhile regime, the levy as well as availment of credit has been removed from the sweep of the Act.  

HC observed that the Revenue has not made out any bar for transitioning EC, SHEC and KKC into GST regime and the petitioner satisfies all conditions under section 140(1) and (8). Further, accumulated credit of aforesaid cesses is not dead and gone, and such credit cannot be said to have been wiped out unless there is a specific order under which it lapses. 

Also, section 140(8) uses the phrase “CENVAT credit” and not “eligible credit”. Hence, any credit carried forward, without restriction on eligibility or otherwise, can be transitioned. This is over and above the conclusion on the larger issue of eligibility under section 140(1), which is held in favor of the petitioner. 

Thus, HC held that the petitioner is entitled to transition i.e., carry forward and utilize accumulated credit pertaining to EC, SHEC and KKC under GST. 

The order was recalled by the HC for making certain changes. However, the revised order maintains the same position as that of earlier order.

Basis this ruling, taxpayers who had not transitioned the credit or reversed the same basis notices received from the Revenue, may evaluate the possibility to avail or reclaim such credit. 

Considering the fact that ruling has significant implication, Revenue is likely to prefer an appeal before the apex court. It will be interesting to see further developments in this matter. 

Similar writ petitions are pending before various other high courts challenging the constitutional validity of the provisions which restrict transition of cess. These rulings, going forward, may also have bearing on the decision to be taken by the taxpayer.