Unacummulated GST ITC : Constitutionality of Section 54(3)

GST or Goods and Services Tax is an indirect tax levied on the supply of both goods and services in India. GST has a dual structure that includes both central and state GST components. The GST regime allows registered businesses to claim input tax credit (ITC) on their tax payments made on purchases that are used for business purposes. ITC is a credit available to the business for the taxes paid on inputs used in the production of goods or services. ITC can be claimed only if the supplier of the goods or services has paid taxes to the government. However, there are certain provisions that prevent businesses from claiming ITC. One such provision is Section 54(3) of the CGST Act, which deals with the unutilized ITC or unacummulated GST ITC.

Unacummulated GST ITC is the credit that remains unused by the business, even after the payment of GST. Section 54(3) of the CGST Act, 2017, states that businesses cannot claim ITC on goods or services that have been used for personal use or are exempt from GST. Additionally, businesses can also not claim ITC if the goods or services have been used for the manufacture of exempt supplies or have been used to provide taxable supplies that are not covered under the GST regime.

The constitutionality of Section 54(3) has been a matter of debate since its introduction. The provision has been challenged on the grounds that it is violative of Articles 14 and 19(1)(g) of the Constitution of India.

Article 14 of the Constitution of India

Article 14 of the Constitution of India guarantees equality before the law and equal protection of the law to all citizens. The provision ensures that all individuals are treated equally under the law and that there is no discrimination on any ground. The provision has been challenged on the grounds that it discriminates against businesses by denying them the benefit of ITC on goods or services that have been used for personal use or are exempt from GST.

However, the Supreme Court has held that taxing different categories of goods or services at different rates is not discriminatory, as long as the classification is rational and based on objective criteria. Therefore, the provision cannot be deemed unconstitutional on the grounds of Article 14.

Article 19(1)(g) of the Constitution of India

Article 19(1)(g) of the Constitution of India guarantees the right to practice any profession, trade, or business. The provision ensures that individuals have the right to carry on any lawful business or trade without any unreasonable restrictions. The provision has been challenged on the grounds that it imposes an unreasonable restriction on the right to carry on business by denying businesses the benefit of ITC on goods or services that have been used for personal use or are exempt from GST.

However, the Supreme Court has held that the right to claim ITC is not an absolute right and can be subject to reasonable restrictions. The restriction imposed by Section 54(3) is reasonable as it is aimed at preventing the misuse of ITC and ensuring that businesses claim credit only for the taxes paid on goods or services used in the production of taxable supplies. Therefore, the provision cannot be deemed unconstitutional on the grounds of Article 19(1)(g).

Conclusion

The constitutionality of Section 54(3) of the CGST Act has been a matter of debate since its introduction. However, the provision has been upheld by the Supreme Court on the grounds that it is a reasonable restriction on the right to claim ITC and is not violative of Articles 14 and 19(1)(g) of the Constitution of India. Businesses must ensure that they claim ITC only for the taxes paid on goods or services used in the production of taxable supplies and that they comply with the provisions of the GST regime to avoid any penalties or legal consequences.