Is amendment in sec 17(5)(i) also required when proposal to amend sec 129 & 130 is laid in Budget?

Section 129 of the CGST Act is being amended to delink the proceedings under that section relating to detention, seizure and release of goods and conveyances in transit, from the proceedings under section 130 relating to confiscation of goods or conveyances and levy of penalty.

The penal provisions under section 129(1)(a) is currently linked to tax as well as penalty i.e. in case of taxable goods, where the owner of the goods comes forward for payment of tax and penalty, the goods, conveyance and documents can be released on payment of applicable tax & penalty equal to 100% of the tax payable. The change proposed vide Finance Bill, 2021 is effectually same but has been worded in terms of penalty only i.e. release can be done on payment of penalty equal to 200% of tax payable on such goods. It is important to note that in case of exempted goods, the penalty amount remains the same i,e, amount of 2% of value of goods, or INR 25,000/-, whichever is less.

The penal provisions under section 129(1)(b) is currently linked to tax as well as penalty i.e. in case of taxable goods, where the owner of the goods does not comes forward for payment of tax and penalty, the goods, conveyance and documents can be released on payment of applicable tax & penalty equal to 50% of the value of the goods reduced by the tax amount paid thereon. The change proposed vide Finance Bill, 2021 is increased and has been worded in terms of penalty i.e. release can be done on payment of penalty equal to 200% of tax payable on such goods or 50% of the value of goods, whichever is higher. It is important to note that in case of exempted goods, the penalty amount remains the same i,e, amount of 2% of value of goods, or INR 25,000/-, whichever is less.

Since the element of tax has been replaced with penalty in section 129, therefore, it appears that consequential amendment should also have been done in clause (i) of section 17(5) which bars availability of input tax credit of 'tax' paid in accordance with the provisions of section 129.

Further, section 130 of the CGST Act is being amended to delink the proceedings under that section relating to confiscation of goods or conveyances and levy of penalty from the proceedings under section 129 relating to detention, seizure and release of goods and conveyances in transit. In this regard, it is worthwhile to note that section 130(3) has been omitted with the intent that as the tax, interest and penalty has to be paid under the proceedings under other sections whilst section 130 deals with penalty & fine in case of confiscation.

Hence, as sub-section (3) of section 130 has been proposed to be omitted, therefore, it appears that consequential amendment should also have been done in clause (i) of section 17(5) which prohibits availability of input tax credit of 'tax' paid in accordance with the provisions of section 130.

In this regard, it is important to note that currently section 17(5)(i) of CGST Act, 2017, disallows the input tax credit of 'tax' paid in accordance with section 74, 129 and 130. Now, as per the proposed amendments in section 129 & 130, it can be observed that element of 'tax' has been replaced by 'penalty' in order to widen the base amount of penalty. In other words, tax has to be demanded under section 73 or 74, as the case may be. In case, the situation falls under section 74, undoubtedly ITC will be disallowed under aforesaid section 17(5)(i) of CGST Act, 2017, however, if the situation falls under section 73, then it should be allowed. It is worthwhile to note that even currently the ITC of tax paid under section 73 is not prohibited under section 17(5)(i). It is worthwhile to note that the 'tax' component, in section 129 currently is also disallowed by virtue of section 17(5)(i) which is now proposed to be replaced with 'penalty' would also make the situation neutral as there is no question of admissibility of ITC on penalty. However, in the absence of any 'tax' payment provision under section 129 & 130 as proposed in Finance Bill, 2021, the consequential amendment in section 17(5)(i) may have been done to make an alignment with the provisions of the law.