Summary
The Supreme Court upheld the High Court's view that Rule 21(8) of the Punjab VAT Rules, 2005, which restricted input tax credit on goods held in stock to the reduced rate of tax, could not operate before 01.04.2014. Only from that date did the amended first proviso to Section 13(1) of the Punjab VAT Act, 2005 supply the statutory sanction needed to cut down credit already earned on inputs bought at the higher rate.
Issues
- Whether Rule 21(8) of the Punjab VAT Rules, 2005, inserted by notification dated 25.01.2014 with effect from 01.02.2014, could be applied before 01.04.2014, when there was no enabling provision in the Punjab VAT Act, 2005 to reduce input tax credit already earned on stock in trade.
- Whether input tax credit earned on goods purchased at a higher rate of tax and lying in stock can be reduced by delegated legislation because the rate of tax on those goods is later lowered.
Provisions considered
- Rule 21(8), Punjab Value Added Tax Rules, 2005Read as providing that where the rate of tax on goods lying in stock is reduced from a particular date, input tax credit on their sale or use in manufacture is admissible only at the reduced rate from that date. The Court held that it could not be applied to stock purchased at the higher rate before the parent Act was amended, and could operate only from 01.04.2014. (¶¶ 12, 28, 29, 34, 36, 41, 41.1, 42)
- Section 13(1), first proviso (before and after amendment by Punjab Act No. 38 of 2013), Punjab Value Added Tax Act, 2005Before amendment, credit was available on goods purchased that are 'for sale' or 'for use' in manufacture; the amendment effective 01.04.2014 makes credit available only once goods 'are sold' or 'are used'. The Court held that this change first furnished statutory sanction for linking credit to the rate at the time of sale. (¶¶ 22, 23, 31, 32, 33, 41, 41.1)
- Section 13(9), Punjab Value Added Tax Act, 2005Used as a further reason: on the State's reading of Rule 21(8), credit to be reversed on unused goods or stock at closure of business would also be reversed only at the lower rate, a fallacious result that would cause revenue loss. (¶¶ 23.1, 41.2)
- Section 70, Punjab Value Added Tax Act, 2005Noted as the rule-making power, under which rules may be prospective or retrospective, but retrospective only where required in public interest. (¶ 24)
Held
- Input tax credit is a benefit traceable to the statute, and any reduction of it, carrying adverse civil consequences for the beneficiary, needs statutory sanction. That sanction came only with the amendment of the first proviso to Section 13(1) from 01.04.2014, so Rule 21(8) could not apply before that date to inputs already bought at the higher rate in concluded transactions. (¶¶ 36, 41, 41.1)
- The change in the proviso from goods that are 'for sale' or 'for use' to goods that 'are sold' or 'are used' is unmistakable: after the amendment, credit becomes available only from the date of further sale or use in manufacture. (¶¶ 32, 33)
- A dealer who paid tax at the higher rate on goods held in stock would suffer serious prejudice if that credit were cut down because the rate was later lowered. Relying on Eicher Motors, New Swadeshi Sugar Mills and Jayam and Company, the Court held that a right to credit accrues when tax is paid on inputs and cannot be taken away by a provision without retrospective sanction; the law in force in the relevant period applies unless otherwise provided. (¶¶ 36, 37, 38, 39, 40)
- The State's reading of Rule 21(8) would also mean that reversal of credit under Section 13(9) on unusable goods or stock at closure is made at the lower rate, which is fallacious and against revenue. (¶ 41.2)
Result
State's appeals dismissed and the High Court's view upheld that Rule 21(8) operates only from 01.04.2014; no order as to costs.