Cash Refund of Lapsed Cesses (EC, SHEC, KKC) Denied Under GST Regime

Cash Refund of Lapsed Cesses (EC, SHEC, KKC) Denied Under GST Regime

Issue

1. Whether unutilised balances of Education Cess (EC), Secondary and Higher Education Cess (SHEC), and Krishi Kalyan Cess (KKC) lying in the CENVAT credit account as of 30.06.2017 can be refunded in cash under Section 142(3) of the CGST Act, 2017.

2. Whether these cesses constituted “eligible duties” for transition to GST, and if the right to claim them acts as a “vested right” that survives their abolition.

Facts

• The Credits: The appellant (KEI Industries) had accumulated unutilised credits of EC, SHEC, and KKC in their CENVAT account before the implementation of GST (01.07.2017).

• The Transition: Since these cesses were not subsumed into GST and could not be transitioned as “Input Tax Credit” under Section 140 of the CGST Act (as they were not “eligible duties”), the appellant sought a cash refund of these amounts.

• Legal Basis: They invoked Section 142(3) of the CGST Act, which allows for the refund of CENVAT credit, duty, or tax paid under the existing law to be disposed of in accordance with the provisions of the existing law (Central Excise Act).

• Rejection: The Department rejected the refund claims, arguing that the levies for EC/SHEC were abolished in 2015 and KKC in 2017. Consequently, the credits had “lapsed” or become “dead,” and no provision existed to refund them in cash.

Decision

The CESTAT Larger Bench ruled in favour of the Revenue, holding that no refund is admissible.

• Credits Lapsed Pre-GST: The Tribunal held that EC and SHEC on goods were abolished on 01.03.2015 and on services on 01.06.2015. With the abolition of the levy, the facility to utilise the credit (which was restricted for payment of the same cess) also ceased. Thus, these became “dead credits” well before GST implementation.

• Section 142(3) is Procedural: The Tribunal clarified that Section 142(3) only provides a mechanism for disposal of refund claims; it does not create a new substantive right to refund. If the credit was not refundable under the pre-GST law (Central Excise Act), Section 142(3) cannot magically make it refundable under GST.

• Time-Barred: Refund claims are governed by the limitation period under Section 11B of the Central Excise Act (1 year). Since the cesses became defunct in 2015, any application filed after 2016 is barred by limitation.

• Slovak India Distinguished: The appellant relied on the Slovak India judgment (which allowed refund of unutilised credit upon closure of business). The Tribunal distinguished it, noting that Slovak India dealt with “eligible” CENVAT credits that could not be utilised due to closure, whereas here, the credits themselves were ineligible and had lapsed by operation of law.

• Precedents Followed: The Bench relied on:

  • Sutherland Global Services (Madras HC): Held that unutilised cess credit cannot be transitioned to GST.

  • Cellular Operators Association (Delhi HC): Held that no vested right exists in accumulated cess credit once the levy is abolished.

Key Takeaways

• No Vested Right in Cesses: Input Tax Credit is a concession, not an absolute right. Once the underlying tax (levy) is abolished without a saving clause for the credit, the accumulated credit lapses.

• Blocked Cesses are Dead: Unutilised balances of EC, SHEC, and KKC are effectively “sunk costs.” They cannot be transitioned to GST, nor can they be claimed as a cash refund.

• Limits of Section 142(3): This section is not a backdoor to claim refunds for credits that were otherwise inadmissible or dead under the old regime. It strictly adheres to the “eligibility” criteria of the erstwhile laws.

• Reporting in TRAN-1: Merely reporting these balances in the TRAN-1 form does not confer any legal right to recover them if the substantive law bans their transition.