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No GST Refund on Input Services

The Apex Court of India Held that No GST Refund of Input Services in cases where refund of unutilised Input tax credit arises on account of inverted duty structure.

Issue before the Apex Court

Whether the term ‘net ITC’ defined in Rule 89(5) is ultra vires to law to the extent it excludes input tax credit on input services for the purpose of computation of refund of unutilized Input tax credit in case of inverted duty structure?

Legal Background

Section 54(3) of CGST Act provides for the refund of unutilized Input tax credit in cases involving:

I) Zero rated supplies made without payment of taxes

II) Credit accumulated on account of rate of tax on input being higher than rate of tax on output supplies.

Rule 89(5) of CGST Rules provides a formula for the refund of unutilized Input tax credit, in a case of refund on Account of inverted duty structure. The said formula uses the term ‘net ITC’ means input tax credit availed on inputs only NOT input tax credit availed on both input and input services.

Judicial journey of the Issue:

  • Division Bench of Gujarat HC on 24th July, 2020 in VKC Footsteps India private limited v Union of India held that:

“Explanation (a) to rule 89(5) which denies the refund of unutilized Input tax paid on input services as a part of ITC accumulated on Account of inverted duty structure is ultra vires the provision of Section-54(3) of CGST Act, 2017”

  • Division Bench of Madras HC on 21st September, 2020 in case of Tvi. Transtonnelstroy Adcons JV v Union of India in a similar case gave contrary decision and held that:
“(1) Section 54(3)(ii) does not infringe article 14 of constitution.
(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.”

Understanding of the Apex Court

The crux of the dispute in the present case pertains to how sub-Section (3) to Section 54 and proviso to sub-Section (1) of Section 54 are to be understood and interpreted.

The first tier is the main provision of Section 54(3) which lays down four conditions:

  • A claim of refund;
  • By a registered tax person;
  • Of any unutilized ITC; and
  • At the end of any tax period, subject to the provisions of sub-Section (10).

The second tier is the first proviso. The first proviso begins with the expression “no refund of unutilized ITC shall be allowed in cases other than” which is followed by clauses (i) and (ii).

The third tier of sub-Section 54(3) consist of the two clauses of the first proviso which deal with two distinct cases:

Clause (i) deals with zero-rated supplies made without payment of tax, while

Clause (ii) deals with credit which has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.

The accumulation for clause (ii) may be due to:

(a) an inverted duty structure when the GST on output supplies is less than the GST on inputs;

(b) stock accumulation;

(c) capital goods; and

(d) partial reverse mechanism for certain services.

There could be other reasons as well, such as excessive discounts or predatory pricing.

In view of the above, the intent of the legislature is to allow refund of unutilized ITC only in selected cases as mentioned in first proviso of Section-54(3) of CGST Act, while there may be many situations in which there may be accumulation of unutilized Input Tax Credit.

Similarly, the word ‘Inputs’ used in clause (ii) of first proviso of Section-54(3) of CGST Act and the same word used in defining the meaning of ‘Net ITC’ in clause (a) of sub rule 5 of Rule 89 of CGST Rules 2017 as against the meaning of ‘Net ITC’ in clause (B) of sub rule 4 of Rule 89 of CGST Rules 2017 where its meaning includes both ‘Inputs and Input Services’ as used for clause (i) of first proviso of Section-54(3) of CGST Act.

Therefore, the Apex Court accepted the decision of Madras HC on 21st September, 2020 in case of Tvi. Transtonnelstroy Adcons JV v Union of India and quashed the decision of Gujarat HC on 24th July, 2020 in VKC Footsteps India private limited v Union of India.

 

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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