Introduction Based on the recommendations of the 28th GST Council Meeting held recently, the Board has issued the Notification bearing No. 20/2018 dt 26th July 2018 to give effect to refund the unutilized input tax credit (ITC) on account of inverted tax structure on textile products from 01.08.2018 for certain commodities, but all the inward supplies received upto the 31st day of July 2018, shall lapse, after payment of tax for and upto the month of July 2018.
In exercise of the powers conferred by clause (ii) of the proviso to sub- section (3) of section 54 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Notification No. 5/2017- Central Tax (Rate) dated 28th June 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 677(E), dated the 28th June, 2017, namely:-
In the said notification, in the opening paragraph the following proviso shall be inserted, namely:-
“Provided that,-(i) nothing contained in this notification shall apply to the input tax credit accumulated on supplies received on or after the 1st day of August, 2018, in respect of goods mentioned at serial numbers 1, 2, 3,4, 5, 6, 6A, 6B, 6C and 7 of the Table below; And (ii) in respect of said goods, the accumulated input tax credit lying unutilised in balance, after payment of tax for and upto the month of July, 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse.”.
Section 2 (67) “inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration.
The term Inward supply has a broad scope and covers all receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration. Thus in other words one may interpret that the complete balance lying in the Electronic Credit ledger as on closing of 31st July 2018, gets wiped out and lapses by this notification.
Inverted duty structure in GST:
Section 54 (3) (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.
It has been notified that no refund of unutilized input tax credit shall be allowed under sub-section (3) of section 54 of the said Central Goods and Services Tax Act, in case of supply of Construction Services.
In respect of goods, the Central Government has notified a list of goods in Notification No. 5/2017- Central Tax (Rate) dated 28th June 2017 in respect of which unutilized ITC will not be admissible as refund
While it is so, the said notification No. 20/2018 now allows refund on following Textile goods from 01.08.2018 onwards
Sl No.1. HSN 5007 -Woven fabrics of silk or of silk waste
Sl No.2. HSN 5111 to 5113 Woven fabrics of wool or of animal hair
Sl No.3. HSN 5208 to 5212 Woven fabrics of cotton
Sl No.4. HSN 5309 to 5311 Woven fabrics of other vegetable textile fibres, paper yarn
Sl No.5. HSN. 5407, 5408 Woven fabrics of manmade textile materials
Sl No.6. HSN. 5512 to 5516 Woven fabrics of manmade staple fibres
Sl No.6A. HSN 60 Knitted or crocheted fabrics [All goods]
Sl No.6B. HSN 5608 Knotted netting of twine, cordage or rope; made up fishing nets and other made up nets, of textile materials
Sl No.6C HSN 5801 Corduroy fabrics
Sl No.7. HSN 5806 Narrow woven fabrics, other than goods of heading 5807; narrow fabrics consisting of warp without weft assembled by means of an adhesive
Refund of ITC on account of inverted duty structure is challenged before the Rajasthan High Court.
In the Rule 89(5) of the Central GST Rules, 2017 and Rajasthan GST Rules, 2017 relating to the refund of input tax credit on account of inverted duty structure has been challenged in the Rajasthan High Court, Jodhpur Bench (Principal Seat) wherein High Court has issued notices to Union of India, Government of Rajasthan and GST Council and sough their reply within four weeks’ time.
Petitioner Shree Ram Products Private Limited stated that proviso (ii) to sub section (3) of Section 54 provides that refund of any unutilized input tax credit (ITC) may be claimed by the registered person in case where credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. However, Ministry of Finance, Government of India and Finance Department, Government of Rajasthan vide notification dated 18.04.2018 made an amendment in the definition of definition of Net ITC as envisaged under Rule 89(5) of the CGST / RGST Rules, with retrospective effect to restrict / not consider the input tax credit availed and accumulated on account of input services while computing the maximum amount of refund. Whereas, prior to said amendment definition of Net ITC includes the unutilized input tax credit availed on input as well as on input services.
The Petitioner argued that, provisions of Rule 89(5) of the CGST/ RGST Rules provides for refund of tax paid on input only without considering and appreciating the fact that the output supply is result of the input as well as input services. It is a reality that without use of input services in the manufacturing sector e.g. without availing services of Goods Transport Agency, Repair and maintenance of plant & machinery / factory building, legal and accountancy services, Job Work etc., it is not possible to supply output goods and services accordingly. Hence, allowing refund of only input tax as availed/charged on inputs per is unreasonable, irrational, discriminatory and defective in nature. Further, there is no apparent justification for excluding tax paid on input services from the purview of Net ITC for computing the refund amount under inverted duty structure.
The petitioner further argued that Rule making power as envisaged by the Government under section 54(1) of the CGST / RHST Act is just to regulate the refund. No rules can be framed under the guise of such power which curtail the right of the Petitioner which is otherwise absolute in the Code. State of Mysore and Ors. vs Mallick Hashim & Co. (SC) (1974) 3 SCC 251.has been relied by the Petitioner side.
Further, restraining the refund of input tax credit availed on input services would lead to result in blockage of funds / working capital in the form of tax paid on input services and affecting the cost competitiveness of small businesses and also paralyzing their working capital / liquidity which is an essential key for their survivor. The treatment of Input and Input Services on different yardsticks and making input tax credit on input eligible to be considered part of Net ITC and tax paid on Input Services ineligible for being considered as part of Net ITC, is against the principal of the fiscal neutrality and seamless flow of the credit which are the foundation principles of the GST. Matter was heard by the bench consisting of Chief Justice and Justice Dinesh Ji Mehta. Notice have been issued by the Hon’ble High Court to the Respondents and sought their reply within a period of 4 weeks.
Conclusion: The notification No.20/2018 is silent about capital goods accumulation as it says only about inputs and services. The textile industry is having accumulated credit in crores as on 31.07.2018 and it would be unfair to lapse the entire credit unutilized on account of inverted tax structure. Let us wait and see whether the Government issues any modified notification to allow the textile sector to claim the refund as on 31.07.2018 also.
The author is a director in Ms Lore Tax Professionals Private Ltd., Coimbatore and can be reached at firstname.lastname@example.org.
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