Background
1. GST is supposed to be a destination-based consumption tax. Hence ideally the said tax should not become part of the cost in the entire chain of value addition. In other words, there should be no cascading effect. If the said tax is getting accumulated in the chain of value addition for various reasons, then it must be refunded back to avoid the cascading effect. Now one of the reasons for the tax getting accumulated in the chain is the inverted rate structure wherein the tax rate applicable on inward supplies is higher than the tax rate applicable on outward supplies.
2. Sec. 54(3)(ii) of the CGST Act, 2017 provides that the registered person may claim a refund of any unutilised input tax credit at the end of any tax period where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), subject to certain exceptions. Hence even though the broader concept of inverted rate structure encompasses even cases where the tax rate on inward services can be higher than the tax rate on output supplies (goods or services or both), the law in question seeks to cover only the cases where the tax rate on inputs (i.e. excluding input services & capital goods) is higher than the tax rate on output supplies. There remained an interpretational issue as to whether once a case is covered in the given provision, then whether the refund shall be restricted only to the extent of accumulated credits on inputs or whether the refund shall be allowed for any accumulated credits (which may also include credits availed on services/capital goods). Hon’ble Supreme Court in the case of VKC Footsteps India Pvt. Ltd.2021-VIL-81-SC held that the refund shall be permitted only in respect of the credits accumulated on inputs.
History of the formula prescribed via Rules
3. At the inception of GST Rule 89(5) of the CGST Rules, 2017 framed by the Government vide exercise of powers available u/s 164 of the CGST Act, 2017 provided for the following formula to compute the eligible refund amount in case of inverted rate structure :
The formula prescribed on 01.07.2017
“(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula –
Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods
Explanation.- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule (4).”
4. The aforesaid formula, therefore, considered the “Net ITC” by virtue of applying the meaning assigned u/r 89(4) to include the ITC on inputs as well as input services. Hence the maximum refund amount was determined considering the accumulated credits in respect of inputs as well as input services.
Formula from 18.04.2018
5. The Government felt that the aforementioned formula was not in accordance with Sec. 54(3)(ii) of the CGST Act, 2017 (since it seeks to permit refund only to the extent of inputs) and hence issued Notification 21/2018-CT dated 18.04.2018 substituting the aforesaid formula with the following formula:
“(5). In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:—
“Maximum Refund Amount = ((Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover) – tax payable on such inverted rated supply of goods and services.
Explanation:— For the purposes of this sub-rule, the expressions –
(a) “Net ITC” shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and
(b) “Adjusted Total turnover” shall have the same meaning as assigned to it in sub-rule (4).”
6. The aforesaid formula applied prospectively from 18.04.2018, therefore, sought to consider only the ITC related to inputs as opposed to the earlier formula that considered even the ITC related to input services.
Retrospective amendment
7. The Government perhaps considering that since the provisions of Sec. 54(3)(ii) of the CGST Act, 2017 have been into effect from 01.07.2017, even the revised formula (which considered only the ITC on inputs) ought to be applied retrospectively from 01.07.2017 and not from 18.04.2018 as done vide Notification 21/2018-CT dated 18.04.2018. Hence the Government issued Notification No. 26/2018-CT dated 13.06.2018 to apply the revised formula from 01.07.2017.
Anomaly
8. The aforesaid change resulted in an anomaly. On one side the formula considered only ITC availed on inputs whereas on the other side considered the entire tax payable on the inverted rated supply to arrive at the accumulated ITC that can be claimed as a refund. This is so because the revised formula assumed and presumed that the entire tax payable on the inverted rated supply has been paid only from the ITC availed on inputs and only the balance left thereafter is eligible for a refund. In other words, the ITC availed on input services and lying in the common pool (known as the electronic credit ledger) remained untouched.
9. Certainly, the above anomaly required a cure. The said anomaly was brought to the notice of the Hon’ble Supreme Court in the case of VKC supra and the Court appreciating the anomaly instead of correcting the formula by itself directed the GST Council to consider the same.
Recent amendment
10. Now GST Council at their 47th meeting decided to correct the anomaly and the Government thereafter issued Notification No. 14/2022 – Central Tax dated 05.07.2022 substituting the tax payable portion of the formula as under:
“Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – {tax payable on such inverted rated supply of goods and services x (Net ITC÷ ITC availed on inputs and input services)}” (emphasis supplied)
11. Hence the anomaly now stands corrected in terms of the formula considering only the tax payable qua the utilization of the ITC on inputs as opposed to the earlier version where the entire tax payable was deducted.
Amendment – whether prospective or retrospective?
12. Now the moot question is whether the aforesaid recent amendment can be considered to be prospective (i.e. applicable only from 05.07.2022 when the notification came into force) or retrospective (i.e. applicable from 01.07.2017 when the law permitting the refund came into force)?
13. The recent notification uses the word “substituted” while making the change. Now Hon’ble Supreme Court in the case of GOI vs. Indian Tobacco Association 2005 (187) ELT 162 (S.C.) in the context of the interpretation of the word “substituted” held that where a statute is passed to supply an obvious omission in a former statute, the subsequent statute relates back to the time when the prior Act was passed. The Court also applied the doctrine of fairness as a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. In this case, the Government had issued a notification granting exemption from payment of additional duty of Customs to those exporters who had been issued a Duty Entitlement Pass Book (DEPB) by the Licensing Authority. In the said notification DEPB was granted only to those exporters who undertook the exports from notified container depots. Certain container depots from where regular exports were done were missed in the said notification. At a later point in time, the mistake was rectified by ‘substituting’ the existing names with new names that included the earlier missed depots. Hence an issue arose as to whether the benefit of DEPB and consequent exemption from additional duty can be availed by exporters who undertook exports from the missed depots during the intervening period. The Hon’ble Court held that since it is a case of supplying an obvious omission when the intention was to allow the benefit, the amending notification should receive a retrospective effect.
14. We may also refer to the following decisions of the Hon’ble Supreme Court where a similar view has been re-iterated:
- CCE vs. Wood Craft Products Ltd. 1995 (77) ELT 23 (S.C.) – Amendment made to clarify and make explicit which was implicit to end the dispute to apply retrospectively.
- P.I.L. Ltd. vs. CCE 2005 (181) ELT 359 (S.C.) – Follows Wood Craft Products Ltd. supra
- CIT vs. Vatika Township P. Ltd. 2015 (1) SCC 1 – Follows Indian Tobacco Association supra to hold that if legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. Retrospectivity is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity.
15. Now Sec. 54(3)(ii) of the CGST Act, 2017 right from 01.07.2017 created a right/benefit by permitting the registered person to claim the refund of the accumulated ITC on inputs under the inverted rate structure. The Rule initially formulated and later amended to quantify the benefit however had two anomalies viz. initial anomaly in terms of considering ITC on inputs as well as input services and subsequent anomaly in terms of considering the entire tax payable to have been paid only by utilising the ITC on inputs. The former anomaly was corrected retrospectively. At this stage it is apt to make a reference to the relevant paragraphs of the ruling in the case of VKC as regards the second anomaly:
“105…….. The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods. This in our view is at odds with reality, where the ITC on both input goods and input services is accumulated in the electronic ledger and is then utilised for the payment of output tax…… Another possible solution could be that the Rule itself provides for a statutory assumption or a deeming fiction of utilisation of a certain percentage of ITC on input services towards the payment of output tax for the purpose of calculation of refund.
106. While we are alive to the anomalies of the formula, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation…….”
16. The aforesaid paragraphs, therefore, indicate that the revision now done is to align the mechanism of the Rule to come in line with the vested right/benefit already created since 01.07.2017. It, therefore, follows that even the correction to the latter anomaly (erroneous consideration of entire tax to have been paid by utilising only ITC on inputs) has to be retrospective. There cannot be a divergent approach in terms of curing a pro-revenue anomaly retrospectively and a pro-taxpayer anomaly only prospectively. Anamoly is an anomaly and deserves equal treatment (i.e. correction from inception). Doing otherwise will be wholly arbitrary and run counter to Article 14 of the Constitution of India.
17. Further, the recent amendment is only making explicit in law that which was already implicit and done with an aim to effectively confer the vested right/benefit already available from 01.07.2017 and resolve the dispute. Hence applying the ratio of the decisions referred to earlier, the amendment deserves a retrospective effect. The taxpayers not left with the possibility to seek a refund of the already accumulated credits must consider making an additional refund claim even for the past periods based on the corrected formula. The trade surely deserves a fair approach.
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