Many small and medium scale companies were panic-struck upon receiving notices from the Indirect Direct Tax Department. The notice was sent over the addition of the Personal Ledger Account or PLA cash balance to transition credit during the transition from the erstwhile VAT to the current GST provisions.
What is PLA?
Personal Ledger Account is an account with the Central Government, which is utilized for payment of EXCISE DUTY on manufacturing or sale of inland goods. But the GST provisions do not allow the use of PLA balance for paying tax liabilities.
When GST was introduced in July last year, the Government had allowed the use of old tax credits in the company account books as transitional credits. The move helped companies to set-off GST liabilities. But Transitional Credit Form TRAN 1 which can be used for transferring erstwhile VAT credits cannot be used for PLA. Accordingly, GST facilitates the transfer of only CENVAT credit through Tran 1. However, most SMEs included the CENVAT credit amount as well as the PLA balance in the TRAN 1. The tax notices have made it clear that Tran 1 form can be used for transfer of CENVAT credit only.
The Special Economic Zones
Economically backward regions like Jammu & Kashmir, Himachal Pradesh, and North East were VAT exempted. The companies operating in these regions stand to lose the most from the Department’s Notice. The primary reason for large PLA balance of the zero-VAT companies is low tax liabilities on finished products as compared to the tax on raw materials.
As there was no provision for money withdrawal or no specific provision to carry PLA credit forward in the GST regime, companies saw no other way but to add the PLA cash balances as transitional credit.
Abhishek A Rastogi, a Partner at law firm Khaitan & Co, said,”For many companies that have manufacturing units in tax-free zones…huge balances were lying in the PLA that had to be transferred back to the businesses as either refund or transition credit under GST”.
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The huge difference in refunds and tax outgo contributed towards huge PLA balances. Some Companies reported PLA balances amounting to Rs 50 crore to Rs 500 crore which was to be re-claimed as refunds. Tax Experts believe that with no impending loss to the exchequer (revenue neutral) companies may even consider a legal route to counter PLA loss. However, if reports are to be believed more notices could be served in upcoming months which include several mid-sized, FMCG and drugs companies present in the special economic zone.
Non-Zero-VAT Companies
Most companies which are not part of the special economic zones, however, were prompt and diligent. In order to carry minimum credits during the transition, most companies made use of their CENVAT and PLA balances just in time before the introduction of GST. This was an ideal move as far as working capital and tax risk was concerned. However, there may still be some companies that could not reach a zero PLA balance owing to either suspension of operations due to increased balances or units occupied with expansion procedures.
One can defend based on SC decision rendered in the case of Commissioner of Income-tax II Vs Modipon Ltd reported in 2017 (356) ELT Page 481. Approving two High Court rulings, the Apex Court has held that “Central Excise duty paid in advance in Personal Ledger Account (PLA) – Deduction under Section 43B of Income-tax Act, 1961 whether it was the actual payment of duty or it was an advance deposit of Central Excise duty and adjustments were to be made on subsequent clearances – HELD: After deposit in PLA, the amount was credited to Revenue with assessee having no domain over it – Amount deposited could be utilized only for the purpose specified – Hence, the assessee was entitled to a deduction on an accrual basis and book entries – It was more so as the consistent practice of deduction followed by the assessee was accepted by Revenue.
The GST Law apparently failed to provide a transitional provision in CASH LEDGER maintained under GST law to transfer PLA credits.