VKC Footsteps India Pvt. Ltd. Vs. Union of India (Gujarat High Court)
High Court held that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGGST Rules,2017 to exclude refund of tax paid on ‘input service’ as part of the refund of unutilised input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act,2017 which provides for claim of refund of ‘any unutilised input tax credit’. The word “Input tax credit” is defined in Section 2(63) means the credit of input tax. The word “input tax” is defined in Section 2(62), whereas the word “input” is defined in Section 2(59) means any goods other than capital goods and “input service” as per Section 2(60) means any service used or intended to be used by a supplier. Whereas “input tax” as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus “input” and “input service” are both part of the “input tax” and “input tax credit”. Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act,2017, the legislature has provided that registered person may claim refund of “any unutilised input tax”, therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit”. Moreover, clause (i) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules 2017.
In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018- GST dated 31.12.2018 to deny the registered person refund of tax paid on “input services’ as part of refund of unutilised input tax credit.
We are of the opinion that Explanation (a) to Rule 89(5) which denies the refund of “unutilised 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.
In view of the above, Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines “Net Input Tax Credit’ means “input tax credit” only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act.
The respondents are therefore, directed to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. Since these petitions are arising out of the common issue, the same were heard analogously and are being disposed of by this Common Judgment.
2. For the sake of convenience, the Special Civil Application No. 2792 of 2019 is treated as the lead matter.
3. The petitioner has prayed for the following reliefs:
“20. The Petitioners, therefore, prays that this Hon’ble Court may be pleased to:
(a) hold that the amended Rule 8 of the CGST Rules is ultra vires Section 54(5) inasmuch as Section 54(3) provides for refund of ‘any unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both ‘inputs’ and ‘input services’;
(b) hold that the amended Rule 89 of the CGST Rules is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently;
(c) hold that Section 164(3) is unconstitutional inasmuch as it suffers from the vice of excessive delegation;
(d) hold that the amendment of Rule 89 cannot be given retrospective application;
(e) issue a Writ of Certiorari or any other appropriate Writ, Order or direction, in the nature of Writ, quashing the refund withholding orders dated 14.06.2018, and letter dated 11.06.2018 issued by Respondent No. 3 enclosed at Exhibit-1 and Exhibit-2 respectively;
(f) direct Respondents herein, pending the present petition, not to initiate any coercive action or recovery proceedings;”
4. The Petitioner is engaged in the business of manufacture and supply of footwear which attracts Goods and Service Tax (for short the “GST”) at the rate of 5%. The Petitioner procures input services such as job work service, goods transport agency service etc. and inputs such as synthetic leather, PU Polyol, etc., on payment of applicable GST for use in the course of business and avails input tax credit of the GST paid thereon. Majority of the inputs and input services attract GST at the rate of 12% or 18%. Thus, GST rate paid by the Petitioner on procurement of input is higher than the rate of tax payable on their outward supply of footwear. Therefore, in spite of utilization of credit for payment of GST on outward supply, there is accumulation of unutilized credit in electronic credit ledger of the Petitioners.
5. The fundamental feature of the GST is that effective taxation of the goods takes place at the stage of supply to the final consumer only and all taxes paid at the anterior stages should be fully absorbed in the tax on outward supply. Where it is not so, refund of accumulated unutilized credit can alone achieve the object of effective taxation only at the stage of supply to final consumer. Sub-section 3 of Section 54 of the Central Goods and Service Tax Act, 2017 (for short “CGST Act”) is inspired by this principle as it provides for refund of unutilized input tax credit where the credit is accumulated on the account of tax rate on inputs being higher than the tax rate on output supplies. Such situation has been referred as inverted duty structure. Section 54(3) (ii) of the CGST Act lays down the eligibility criteria for the grant of refund on account of inverted duty structure or condition precedent. The criterion being, that the ‘rate of tax on inputs being higher than the rate of tax on output supplies’. Thus, as per these provisions, it provides the circumstance under which the refund of unutilized credit will be granted. Section 54(3) of the CGST Act provides for refund of any unutilized input tax credit’ and the said provision itself specifies the quantum of refund which will include credit availed on input services apart from inputs. This is so because the term “input tax” is defined in Section 2(62) of the CGST Act inter alia as tax charged on supply of goods or services or both. “Input tax credit” is defined in Section 2(63) of the CGST Act as the credit of input tax.
6. Rule 89(5) of the Central Goods and Service Tax Rules,2017 (for Short “CGST Rules, 2017”) is enacted to provide formula for determining the refund on account of inverted duty structure and an assessee is entitled to refund of the unutilized input tax credit availed during the relevant period proportionate to the turnover of inverted rated supply of goods vis-à-vis total turnover of the assessee for that period. Circular No. 79/53/2018-GST dated 31.12.2018 provides example at para 4(b) which is informative,(i) if, the rate of GST on some inputs is higher than the rate of GST applicable on the output supply, while rate of GST on some other inputs is lower than the rate of GST applicable on the said output supply, then that is a situation of inverted duty structure governed by Section 54(3) of the CGST Act, (ii) if, assessee supplies goods and none of which involve inverted duty structure, it is not entitled for any refund of unutilized input tax credit,(iii) if, assessee supplies goods involving only inverted duty structure, then entire unutilized credit is refundable to it and (iv)if, an assessee is engaged in making two supplies, one involving inverted duty structure and other not involving inverted duty structure, then it is not entitled for refund for second category of supplies and eligible for refund only for first category of supplies.
7. The provision of Rule 89(5) of the CGST Rules, 2017 as originally introduced was substituted vide Notification No. 21/2018-CT dated 18.4.2018 prescribing a revised formula for determining the refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide Notification No. 26/2018-CT dated 13.6.2018. The revised formula inter alia excluded input services from the scope of ‘net input tax credit’ for computation of the refund amount under the Rule. Thus, the substituted Rule 89(5) of the CGST Rules, 2017 denied refund on the input tax credit availed on input services and allow relief of refund of input tax credit availed on inputs alone.
8. Thus, in the present case, Respondents are allowing refund of accumulated input tax credit of tax paid on inputs such as synthetic leather, PU Polyol, etc. However, refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied.
9. The Petitioners have therefore challenged validity of amended Rule 89(5) of the CGST Rule, 2017 to the extent it denies refund of input tax credit relatable to input services.
10. It is significant that it is not the case of the Respondents that credit for the tax paid on input services is not available to petitioner. Respondents are only denying refund in cash of unutilized amount of input service credit. Respondents are willing to grant refund in cash of unutilized amount to the extent relatable in inputs only.
I. SUBMISSIONS ON BEHALF OF THE PETITIONERS
11. The learned senior advocate Mr. Sridharan assisted by learned advocate Mr. Anand Nainawati for the petitioner in SCA No.2792 of 2019 submitted as under :
11.1 It was submitted that the fundamental principle of GST laws worldwide is that it is a multi-stage tax. Each point in a supply chain is potentially taxed. However, suppliers are entitled to avail credit of taxes paid at anterior stage. This feature of GST leads to its description as being a tax on value addition, with final consumer alone ultimately bearing the tax. The GST law as enacted in India is also based on this principle.
11.2 It was submitted that the First discussion paper published on 10.11.2019 by the Empowered Committee of State Finance Ministers explained that the introduction of GST would achieve a continuous chain of set-off from the original manufacturer to the last retailer in the supply chain and eliminate the burden of all cascading effects. The relevant excerpts from the discussion paper have been reproduced hereunder:
“1.14 In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. This is the essence of GST, and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax.
1.15 The GST at the Central and at the State level will thus give more relief to industry, trade, agriculture and consumers through a more comprehensive and wider coverage of input tax set-off and service tax setoff, subsuming of several taxes in the GST and phasing out of CST.
…… emphasis supplied”
11.3 It was submitted that the Statement of Objects and Reasons appended to the Bill introducing the CGST Act also stated that GST will be levied at each stage of supply chain and the taxes paid at earlier stage will be available as input tax credit. The relevant extract of the same is as under:
“3. In view of the aforesaid difficulties, all the above mentioned taxes are proposed to be subsumed in a single tax called the goods and services tax which will be levied on sac o! of goods or services or both at each stage of supply chain starting from manufacture or import till the last retail level.
4. … The proposed legislation will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. Due to seamless transfer of input tax credit from one stage to another in the chain of value addition there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers.
…… emphasis supplied”
11.4 It was submitted that the Frequently Asked Questions (FAQs’) on GST issued by the Central Board of Excise and Customs on 21.6.2016 updated from time to time, explains GST as under:
“Q 1. What is Goods and Services Tax (GST)?
Ans. It is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.”
11.5 It was submitted that the Government issued the GST flyers to create awareness amongst the trade and industry regarding the various provisions of GST also emphasized that uninterrupted and seamless flow of input tax credit is one of the key features of GST. Flyer No. 19 dated 1.1.2018 issued by the CBEC explaining the input tax credit mechanism in GST reads thus:
“Uninterrupted and seamless chain of input tax credit hereinafter referred to as “ITC” is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is ’tax on tax’. Under the present system of taxation, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments, and vice versa. One of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently. As the tax charged by the Central or the State Governments would be part of 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.”
11.6 It was submitted that thus, GST is a consumption tax where tax burden is borne by the final consumer and business does not bear the burden of the tax since the business are allowed to take credit of the tax paid on anterior supplies received by them.
11.7 It was submitted that the Organisation of Economic Co-operation and Development (OECD) has issued international VAT/GST Guidelines which elucidate that VAT/GST are consumption tax and are borne ultimately by the final consumers and relevant portion relied on is as under:
“INTERNATIONAL VAT/GST GUIDELINES
PREFACE…
4. … In addition it should be borne in mind that value added tax systems are designed to tax final consumption and as such, in most cases it is only consumers who should actually bear the tax burden. Indeed, the tax is levied, ultimately, on consumption and not on intermediate transactions between firms as tax charged on these purchases is, in principle, fully deductible. This feature gives the tax its main characteristic of neutrality in the value chain and towards international trade.
CHAPTER I
BASIC PRINCIPLES
I.A. INTRODUCTION
1. There are many differences in the way value added taxes are implemented around the world and across OECD countries. Nevertheless, there are some common core features that can be described as follows:
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