Companies to contest notices for reversal of input tax credit

Some of the companies which have received notices to reverse input tax credit in service tax are planning to challenge the revenue department's stand at the commissioner level on the ground that they should not be served these notices since they have not given any services by investing in securities and mutual funds.  

The notice, if upheld, could have repercussions for the goods and services tax (GST) regime as well as similar provisions exist in the new indirect tax regime as well. 

The companies have not been trading in stocks but investing in stocks and as such not providing any services, Abhishek Rastogi, partner with Khaitan & Co., said. 

Services are provided by mutual funds, or brokers or investment advisers,  experts said and not these companies. They are, in fact, recipient of services. 

According to Cenvat rules, companies have to reverse input tax credit on exempted turnover arising out of their non-core businesses. 

In this case, the tax department has asked companies to reverse their credit since they have not paid service tax on their investments in securities markets directly or through mutual funds. 

M S Mani, partner with Deloitte, said," it would be unfortunate that new litigation, which is expected to be lengthy, is being triggered after service tax has been replaced by GST."

Shubham Mittal, the indirect tax expert at Taxmann, said the issue of reversal of credit would arise in GST as well.

When asked whether banks which have treasury departments for investing in bonds would also be asked to reverse input tax credit, expers said banks fall in separate category since they get only 50 per cent of input tax credit. 

The tax department had served notices to automobile companies such as Hyundai, Honda and pharma companies such as Lupin and Cipla, besides fast moving consumer goods companies to reverse their input tax credit in proportion of their income earned through buying and selling of mutual fund units, dividend earned through stocks and interest income through bonds.