Introduction
The new section 16(5) of the CGST Act allows taxpayers to claim Input Tax Credit (ITC) for a certain period. This is a helpful step by the government to support GST-registered businesses in claiming their unused ITC for the financial years 2017-18 to 2020-21. They can do so until November 30, 2021.
This section was added retrospectively from July 2017 through the Finance Act, No. 2 of 2024. If a taxpayer was unable to claim their ITC during this period due to unavoidable reasons, especially during the COVID-19 pandemic, they could claim it in any return filed under Section 39 until November 30, 2021.
The Madras High Court recently delivered a significant judgment in Ghalaxy International Industries v. State Tax Officer, Sangagiri, bringing relief to taxpayers dealing with Input Tax Credit (ITC) reversals. The case revolves around the retrospective amendment of Section 16 of the Central Goods and Services Tax (CGST) Act, 2017, which extended the deadline for claiming ITC. This decision has important implications for businesses that faced hardships in filing returns on time due to various constraints, including financial difficulties and the COVID-19 pandemic.
Background of the Case
The petitioner, Ghalaxy International Industries, represented by its proprietor P. Prakash, challenged an order issued by the respondent, the State Tax Officer, Sangagiri. The order, dated 12.04.2024, confirmed the reversal of ITC worth Rs.18,46,964/- along with penalties and interest. The primary reason for this reversal was the delayed filing of the GSTR-3B return.
The petitioner argued that the delay was due to unavoidable circumstances, such as financial difficulties and disruptions caused by the COVID-19 pandemic. Moreover, the petitioner contended that the retrospective amendment to Section 16(4) of the CGST Act extended the deadline for ITC claims, thereby rendering the reversal order unsustainable.
Legal Issues Involved
The core issue in this case was whether the petitioner could claim ITC despite a delayed filing of the GSTR-3B return. The relevant provisions of the CGST Act that were considered include:
- Section 16(4): Specifies the deadline for claiming ITC, which was originally restricted to the filing of the relevant annual return or November 30 of the following financial year, whichever is earlier.
- Section 16(5): Introduced through an amendment, allowing ITC claims for financial years 2017-18 to 2020-21 up to November 30, 2021, retrospectively effective from July 1, 2017.
The court had to determine whether the petitioner was eligible to claim ITC under the newly inserted Section 16(5).
Court’s Observations and Judgment
The Hon’ble Justice Krishnan Ramasamy noted that the issue had already been settled in a previous case, Sri Ganapathi Pandi Industries v. Assistant Commissioner (State Tax) (Fac), Tondiarpet Assessment Circle, Chennai, decided on 17.10.2024. The court acknowledged that the GST Council, in its 53rd meeting held on 22.06.2024, had recommended an extension for claiming ITC, which was later formalized through amendments and notifications.
The court also took note of the following developments:
- The Finance Act (No.2) of 2024 incorporated the GST Council’s recommendation, allowing taxpayers to claim ITC for past years under Section 16(5).
- Notification No. 17 of 2024-Central Tax, issued on 27.09.2024, confirmed the retrospective amendment.
- Circular No. 237/31/2024-GST, issued by the Central Board of Indirect Taxes and Customs (CBIC), clarified the implementation of these provisions.
Given these legal advancements, the court ruled in favor of the petitioner and quashed the ITC reversal order.
Key Takeaways from the Judgment
- Retrospective Effect of ITC Extension: The court reaffirmed that the amendment to Section 16(4) and the insertion of Section 16(5) apply retrospectively from July 1, 2017, benefiting taxpayers who filed their GSTR-3B returns by November 30, 2021.
- Relief for Taxpayers Facing ITC Reversal: This judgment serves as a precedent for other taxpayers who have faced similar reversals due to delayed filings.
- Restriction on Further Actions by Tax Authorities: The court restrained the tax authorities from initiating further proceedings based on limitation grounds.
- Direction to De-freeze Bank Accounts: The authorities were instructed to unfreeze the petitioner’s bank accounts, which had been frozen due to the impugned order.
- Refund or Adjustment of Collected Taxes: Any amounts collected from the petitioner due to the ITC reversal must be refunded or adjusted against future tax liabilities.
Implications for Businesses and Taxpayers
This ruling provides much-needed relief to businesses that were unable to claim ITC due to financial constraints, health issues, or other unforeseen circumstances. The extension of the deadline ensures that genuine taxpayers are not penalized for delays that were beyond their control.
Moreover, the decision underscores the importance of adhering to GST Council recommendations and subsequent amendments. It also highlights the judiciary’s role in ensuring fair treatment for taxpayers while interpreting tax laws in alignment with legislative intent.
Final Words
The Input Tax Credit (ITC) is a key benefit available to GSTN holders, allowing them to offset their tax liability to the government. If ITC is denied to a GSTN holder—except in cases where it is legally blocked under GST law—it can lead to an increased working capital burden, which is not favorable for businesses. The introduction of this provision has expedited the resolution of numerous pending cases with authorities and courts, leading to faster conclusions
The Madras High Court’s judgment in Ghalaxy International Industries v. State Tax Officer, Sangagiri is a landmark decision that upholds the rights of taxpayers to claim ITC as per the amended provisions of the CGST Act. By quashing the reversal of ITC and restraining further action by tax authorities, the court has set a precedent that will benefit businesses struggling with ITC claims due to past constraints.
Taxpayers facing similar issues should refer to this judgment and seek appropriate legal recourse if their ITC claims have been reversed on limitation grounds. This decision reiterates that the retrospective amendments to the CGST Act must be upheld to ensure a fair and just tax system.
