Unacummulated Tax Credit On Input Services : Constitutionality of Section 54(3) of CGST Act, 2017
INTRODUCTION
In every constitutional democracy, taxation is considered as one of the essentials that shape the growth of its politic. In India, the policy decisions pertaining to taxation affects the relation between government and citizen. No governmental power can be exercised without certain conditions and limitations. The precept of taxation is not entwined by limitation of equality. Instead, equality is not a dimension to frame a tax policy. India has a history of having a comprehensive and at same time, complicated tax regime. In order to replace the ineffective and complex system of levying taxes, the Goods and Services Tax (GST) was rolled out in 2017 by the Indian government. The Goods and Services Tax brought a simple and uniform scheme of levying taxes for domestically produced goods and availed services by prescribing different tax slabs.
Input Credit Tax Mechanism is a key feature of GST. It is a mechanism which was introduced in order to avoid cascading of taxes which means ‘tax on tax’. In pre-GST regime, there was no provision of credit mechanism on the payment of taxes levied by Central Government. In addition to this, there was a separate set of taxes which were levied by state governments. Hence, taxes being levied by central government were not available as set-off for payment of taxes being levied by state government. Under the GST, this system of levying taxes was replaced by carrying forward rule. In other words, as the tax charged by the central government or the state governments is subject to the same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.
UNUTILISED TAX CREDIT
Unutilized tax credit or accumulated input tax credit happens when the tax paid on inputs is more than the output tax liability. Such accumulation will have to be carried over to the next financial year till such time as it can be utilized by the registered person for payment of output tax liability. There may be a variety of reasons for accumulated input tax credit. Thus, Parliament has envisaged a specific situation where the credit is accumulated due to inverted duty structure where the tax liability on inputs is apparently more than the output tax liability. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3) of the Central Goods and Service Tax Rules 2017.
LEGAL PROVISIONS
The Central Goods and Service Tax Rules 2017 have been formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Section 54 of the CGST Act provides for a refund of tax. Under sub-Section (1) of Section 54, a person claiming a refund of “tax and interest, if any, paid on such tax or any other amount paid” has to make an application within two years of the relevant date. Section 54(3) provides for a claim of refund of unutilized ITC. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”. The definition of the expression ‘Net ITC’ in Rule 89(5) originally meant “input tax credit availed on input and inputs services”. By the amendment of 18 April 2018, the definition of ‘Net ITC’ was substituted so as to mean ITC availed on inputs, with prospective effect. On 13 June 2018, this definition was made applicable with retrospective effect from 1 July 2017.
POINT OF DISCOURSE
Section 54(3) of the Central Goods and Services Act, 2017 provides for refund of Input Tax Credit where the accumulation is due to Input Tax Credit. Input Tax Credit includes the credit of input tax charged on the supply of goods as well as services. Section 54(3) does not restrict the entitlement of refund only to unutilized ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilized ITC when the rate of tax on input services is higher than the rate of tax on output supplies. Though Section 54(3) of CGST Act provides for refund of accumulated tax credit on inputs as well as input services but Rule 89(5) of CGST Rules, 2017 excludes tax on input services from the purview of the formula. Section 54(3) also limits the refund of tax credit on the basis of two conditions that no refund of unutilized input tax credit shall be allowed in cases other than––
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.
The above confusion which was raised due to distinction made between input and input services to avail refund created uproar among suppliers and manufacturers. The lack of uniformity between Section 54(3) and rule 89(5) led to a batch of pleas filed before High Courts. The main contention which was raised by assesses was that Section 54(3) acts as a restriction against a claim for refund of accumulated input tax credit by confining it only to tax on inputs and that it would be unconstitutional as it would lead to discrimination between inputs and input services.
CONSTITUTIONALITY OF SEC 54(3) r/w Rule 89(5)
The Gujarat High Court in the case of VKC Footsteps India Pvt. Ltd. v. Union of India, the Division Bench of the Gujarat High Court, held that explanation (a) to Rule 89(5) which denies the refund of “unutilized input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017 and therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilized ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3). But in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India, the Madras High Court held that:-
(1) Section 54(3)(ii) does not infringe Article 14.
(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilized 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 unutilized input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.
The above conflicting opinions of the two high courts made the applicants approach the Supreme Court. The Supreme Court in the case of Union Of India v. VKC Footsteps India Pvt. Ltd, deliberately interpreted the legislative intention behind Section 54 of CGST Act, 2017. Before coming upon a conclusion, the apex court analyzed the core issues circumscribing the whole matter and which was to interpret the expressions, input and Net ITC. Accordingly, the Court reviewed the submission made by both the parties. On submission of the Counsels, the apex court said that, the justification of the formula under Rule 89(5) given by the appellant to create a legal bifurcation is valid. On the submissions of the assessee, the court held that the formula creates a distinction between suppliers having a higher component of input goods than those having a higher component of input services, and must be read down accordingly, must be rejected. The purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. Once the principle behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot be struck down merely for giving effect to the same.”
The Court further went on to say that the above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilized ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by the Respondents that by prescribing an order of utilization would take this Court down the path of redrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Hence, the Court affirmed the judgment of Madras High Court by upholding the constitutionality of section 54(3) of Central Goods and Services Act, 2017 read with 89(5) of CGST Rules, 2017.
The courts do not generally construe the fiscal legislations to let it incline in favour of the taxpayers. In the above case, the Supreme Court referred to its one of its judgments , that is, RK Garg case wherein, Justice P.N Bhagwati was speaking for the Constitution Bench underscored the importance of the rationale for viewing laws relating to economic activities with greater latitude than laws touching civil rights. The Honorable Justice gave a remarkable opinion and held:
“Laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved.”
Although the courts do not generally delve into an easy interpretation of strict economic legislations, they do leave a room for the legislature to improvise on the loopholes so as to serve the larger interests of the sections of society affected by it. In the above case, the apex case said,
“The above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Counsels on behalf of the Respondents by prescribing an order of utilization would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.”
So, it could be reckoned that the there is always of tilt of balance shifted in favour of those who are governed by a strict statute. Statutory prescriptions do not always acts as limitations on the rights of the citizens. The Constitutional vision of making legislations for social and economic welfare of the nations is always upheld by the Courts by mapping out a path in helping the legislature and executive make good policies and frameworks.
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