Summary: An attempt has been made to analyze the impact of change made in clause pertaining to time period prescribed for filling refund application of unutilised input tax credit on account of inverted duty structure. Whether the changes made in clause (e) of Explanation 2 to section 54 of the CGST Act, 2017 justifies its retrospective application or not? What will be the status of application filled for refund for the tax period prior to February, 2019? Whether those will be governed by the earlier time clause or substituted time clause? A logical & just approach suggests that the amendment should apply in respect of refund application filled for the tax period reckoning from February, 2019.
In this Article, an attempt has been made to discuss the impact of change made in Section 54 of the Central Goods & Service Tax Act, 2017 in relation to time period prescribed for filling application for refund of unutilised input tax credit on account of inverted duty structure.
1.1. Before going further, it is equally important to understand the basic structure of said section 54 of the Act, ibid and other provisions of the Act, ibid relating to Input Tax Credit under the GST Law. Attention is invited to Section 16 of the Act, ibid which provides that on making compliance with provisions of the said section, the registered person is entitled to take input tax charged on any inward supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. The conditions which registered person is required to comply with before making claim of any input tax credit are listed as follows:
1) That, registered person is in possession of tax invoice or debit note issued by a supplier registered under this act or such other tax paying documents as may be prescribed;
2) That, registered person has received the goods or services or both;
3) That, tax charged in respect of such supply has been actually paid to the government, either in cash or through utilization of input tax credit admissible in respect of said supply; and
4) That, person has furnished return under section 39 of the Act, ibid.
It is pertinent to mention here that in addition to the aforementioned conditions, the registered person has also to ensure that input tax charged on any goods or services or both is not prescribed under the negative list of input tax credit as mentioned in Section 17(5) of the Act, ibid and other related provisions are also complied with. These related provisions are not discussed in this paper, as these do not have any relation to the moot question of this paper and are mentioned only to make readers aware about that incidental conditions, which equally have to be kept in mind while availing input tax credit on inward supplies.
1.2. Once, the registered person makes compliance with the aforesaid conditions and other related compliances as required for the availment of input tax credit, the tax paid on inward supply procured by him accrues as Input Tax Credit to such registered persons meaning thereby that a right has arisen to the registered person. This vested right of input tax credit arises to the registered taxpayer against the government and which is exercised by the adjusting the said input tax credit in accordance with provisions of law against the output tax liability of registered person on outward supplies made by him. At the same time, in some cases (i.e. where the input tax credit remains available even after adjustment of output tax liability) the registered person is entitled to exercise this right of input tax credit by claiming the refund of that input tax credit from the Government, which can also be termed as right of refund of unutilised input tax credit. Thus, we can say that the vested right of input tax credit arises to the registered person as soon as the registered person makes compliance with conditions required for vesting this right of input tax credit. Once this vested right arises to the registered person, it becomes his property / asset and it is on this terminology the Input Tax Credit lying unutilised after adjustment of output tax liability is recognized as asset in the books of account of the registered person, which implies that this vested right of input tax credit can be used by the registered person in future itself either by adjusting the same against his outward tax liability or claiming refund of such input tax credit from the government as per the law.
1.3. Thus, as soon as the conditions prescribed in relation to availment of input tax credit have been complied by the registered person, a vested right arises to him and such right cannot be taken back / repossessed from him, as that will tantamount to infringement of right / asset of a person, which will be a gross violation of principle of natural justice of law and also against the basic & fundamental constitutional values. The right of Input Tax Credit once arises to the taxpayer is an Indefeasible Right and its benefit is available to the taxpayer without any limitation of time. There is a plethora of judgements delivered by Hon’ble Courts in this aspect and reliance has been placed on following judgements delivered by the Hon’ble Supreme Court:
Collector of Central Excise, Pune v. Dai Ichi Karnataka Ltd, 1999 (112) E.L.T. 353 (S.C.)
Eicher Motors Ltd. v. Union of India, 1999 (106) E.L.T. 3(S.C.),
It is pertinent to mention here that the Hon’ble Gujarat High Court in its judgment delivered in the case of “SHABNAM PETROFILS PVT. LTD. Vs. UNION OF INDIA & 1 other(s)” dated 17.07.2019 has quashed the Notification No. 20/2018-CT dated 26.07.2018 and Circular No. 56/30/2018-GST dated 24.08.2018 to the extent, it provides that input tax credit lying unutilized in balance, after payment of tax for and upto the month of July, 2018 on the inward supplies received upto the 31st day of July, 2018 shall lapse. The said judgement of hon’ble court also supports the above explained preposition that the right of input tax credit once arises to the taxpayer is an indefeasible right.
2.1. As discussed in the preceding paragraphs, the right of input tax credit can also be claimed / settled by exercising the right of refund of unutilised input tax credit from the government in accordance with the provisions of law. In GST law, Section 54 of the Central Goods & Service Tax Act, 2017 deals with the refund provisions. In order to have clear understanding regarding the said section, the relevant legal provisions of section 54 of the Act, ibid are reproduced as hereunder:
“54. (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:
Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed.
(2) ……………………………………………………………………………….. ..
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised 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:
Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
(4) The application shall be accompanied by—
(a) such documentary evidence as may be prescribed to establish that a refund is due to the applicant; and
If we go through the above reproduced legal provision of Section 54 of the Act, ibid we would appreciate the fact that the said section contains two sets / codes of provisions. The first can be referred as set of provisions which provides substantive law, sub-section 3 is an example of this, which talks about refund of unutilised input tax credit. The second can be referred as set of provisions which provides procedural law, sub-section 4 & 1 are example of this, which provides procedure for exercising the right of refund.
2.2. The sub-section 3 of Section 54 of the Act, ibid provides that a registered person can claim refund of unutilised input tax credit only in following two situations:
I. Zero Rated Supplies made without payment of tax (i.e. Export of Goods or Services or
II. Where a person is engaged in business in which rate of tax on input supplies is higher than rate of tax on output supplies (other than nil rated and fully exempt supplies) except such supply of goods or services or both as may be notified by the government.
The 2nd Proviso to sub-section 3 of section 54 of the Act, ibid in a very express language provides that as soon as a registered person make outward supply on which rate of tax is lower than the rate of tax on inputs and due to which unutilised credit accumulated to him at the end of any tax period, the right of claiming refund of that unutilized input tax credit vests with the registered person.
It is equally important to note here that the legislature in its wisdom has deliberately used the word “Inputs” only in said proviso while vesting right of refund with the registered person and accordingly not allowed the refund of accumulated ITC on account of “Input Services & Capital Goods.” As we have elaborately discussed in paragraph 1.1 to 1.3 of this paper that as soon as the conditions prescribed for vesting of right are fulfilled, that right vests with the person & once it is vested it is an indefeasible right. On the same analogy drawn from that discussion, the right of refund of unutilised input tax credit vests with the registered person at the end of the tax period in which he made supplies which are subject to inverted duty structure subject to supply of those goods or services or both as may be prescribed by the government.
2.3. Now coming to the time period prescribed for filling application for refund of unutilised input tax credit, the sub-section 1 of section 54 of the Act, ibid provides that a registered person may make an application for refund before the expiry of two years from the relevant date in such form and manner as may be prescribed. The said provision is purely of a procedural nature brought into the law book to facilitate the implementation of substantive law as mentioned in sub-section 3 of said section (i.e. refund of unutilised ITC) and hence to be operate within the overall contour of substantive law related to refund of unutilised ITC. With respect to mentioning of time clause in the law book, the said clauses are provided for with the solo motive of regulating the whole process, as some time frame has to be put on for purposeful regulation & implementation of the law. Without mentioning of time period, there would be totally chaos and it will not be possible to implement the law effectively. Hence, these types of provisions are termed as of procedural nature and accordingly cannot negate / reduce the substantive law or infringe the vested right of a person retrospectively.
3.1. With the above discussion in background, it is relevant here to understand the effect of substitution of old provision of law with the new provision of law, more precisely what does the term “Substitution” connotes. The Hon’ble Courts in number of cases have held that the whole process of substitution consists of two steps: first, the old rule is made to cease to exist and, next, the new rule is brought into existence in its place. Thus, Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision. The reliance has been placed on following judgements in this regard:
West U.P. Sugar Mills Assn. v. State of U.P . (SC);
State of Rajasthan v. Mangilal Pindwal (SC).
3.2. Reference can also be drawn from the Section 6 of the General Clauses Act, 1897 which also in a very clear & express language provides that repeal of any act does not affect any right, privilege accrued, liability incurred under any enactment so repealed. The said section is reproduced as hereunder:
“6. Effect of repeal.—Where this Act, or any 4[Central Act] or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not—
(a) revive anything not in force or existing at the time at which the repeal takes effect; or
(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or
(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or
(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or
(e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid;
and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.”
3.3. It is also relevant here to understand when does an amendment made is seemed to have effect from retrospective date. The Hon’ble Supreme Court in its judgement delivered in the case of “Govinddas v. Income-tax Officer, AIR 1977 SC 552” has held that “Now it is a well settled rule of interpretation hallowed by time and sanctified by judicial decisions that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or
create a new obligation or impose a new liability .” Thus, any amendment made in a statute shall have effect from prospective date unless it is expressly provided or necessarily inferred from the language of the statute which so warrants.
4.1. As we have extensively discussed & understood the concept of vested right, law of substantive & procedural nature and other legal concepts, which is essential to appreciate the moot question of this paper in an effective & wholistic way. Central Goods & Service Tax Amendment Act, 2018 has substituted the clause (e) of 2nd Explanation to Section 54 of the CGST Act, 2017, w.e.f. 01 .02.2019, which defines the relevant date for filling application for refund of unutilised input tax credit. The said clause prior to its substitution read as hereunder:
“Explanation – For the purpose of this section, —
(2) “relevant date” means –
(a) ……………………… ..
(b) ……………………… ..
(c) …………………….. …
(e) in the case of refund of unutilised input tax credit under sub-section (3), the end of the financial year in which such claim for refund arises; ”
Whereas w.e.f. 01.02.2019, CGST Amendment Act, 2018 has substituted the above said clause with the clause reproduced as hereunder:
“(e) in the case of refund of unutilised input tax credit under clause (ii) of the first proviso to sub-section (3), the due date for furnishing of return under section 39 for the period in which such claim for refund arises.”
4.2. Thus, in accordance with the provisions of earlier clause a registered person can file application for refund of unutilised input tax credit before the expiry of 2 years from the end of the financial year in which such claim for refund arises. Whereas as per the substituted clause, the time period has been revised / reframed as 2 years from the end of due date for furnishing of return under section 39 for the period in which such claim for refund arises.
Now, the basic question that is whether the substituted clause will have application only in relation to refund application filled for the tax period reckoning from the February, 2019 onwards or will also hit the refund application filled after the date 01.02.2019 even pertaining to the tax period(s) prior to February, 2019. If the later approach is presumed to be operational, then, it will abolish the right of the person retrospectively, who has refund due for the tax period of September, 2017 & file application for the said refund in the month of Feb, 2020, which does not seems to be in accordance with the spirit of law and accordingly will have to go through the judicial inquiry.
Disclaimer: This Article is purely for study purpose. Although due care has been taken while preparing this article, but some error may creep in and accordingly before taking any action on the basis of this article, it is highly recommended to take note of the GST law first. In case of any suggestion, query you can contact the author on e-mail id [email protected]