“Unlock GST refund complexities! Dive into Section 54(3)(ii) of the CGST Act, 2017. Know how matching input and output, irrespective of tax rates, allows refunds. Stay compliant, claim your entitlement.
Refund under proviso to 54(3)(ii) of the CGST Act, 2017 is allowed in case where input and output are same and no need to compare rate of tax of principal input with rate of tax of principal output.
In term of Section 54(1) of the CGST Act, 2017, any person claiming refund of tax and interest paid on such tax or any amount paid by him, is entitled to make an application for refund before expiry of two years from the relevant date, which is defined under Explanation (2) to Section 54 of the CGST Act, 2017.
Sub-section (3) of Section 54 of the CGST Act, 2017 provides that subject to provisions of Sub-section (10) of Section 54 of the CGST Act, a person may claim refund of unutilised ITC at the end of any tax period. However, the proviso to Sub-section (3) to Section 54 of the CGST Act restricts the entitlement to refund of unutilised ITC. It expressly provides that no refund of unutilised ITC would be allowed except in cases covered under Clauses (i) and (ii) of the proviso to Section 54(3) of the CGST Act. Under Clause (i) of the proviso to Section 54(3) of the CGST Act, refund of ITC is available in cases of zero rated supplies made without payment of tax. In terms of Clause (ii) of the proviso to Section 54(3) of the CGST Act, refund is admissible, where the credit is accumulated on account of rate of tax on inputs being higher than the rate of tax of output supplies.
Sub-section (3) of Section 54 of the CGST Act, 2017 is set out below:
“Section 54. Refund of tax.-
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(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.”
The Supreme Court had considered the proviso to sub-section (3) to Section 54 in Union of India and Ors. v. VKC Footsteps India Pvt. Ltd. (2022) 2 SCC 603 and had authoritatively held that the refund of unutilised ITC was confined to two categories as spelt out in Clauses (i) and (ii) of the proviso to Sub-section (3) of Section 54 of the CGST Act. The relevant extract of the said decision is set out below:
“98. Sub-Section (3) of Section 54 begins, in its main part, with the stipulation that a registered person may claim refund of any ‘unutilised ITC at the end of any tax period’. Whether we construe the first proviso as an exception or in the nature of a fresh enactment, the clear intent of Parliament was to confine the grant of refund to the two categories spelt out in clauses (i) and (ii) of the first proviso. That clauses (i) and (ii) are the only two situations in which a refund can be granted is evident from the opening words of the first proviso which stipulates that “no refund of unutilised input tax credit shall be allowed in cases other than”. What follows is clauses (i) and (ii). The intent of Parliament is evident by the use of a double – negative format by employing the expression “no refund” as well as the expression “in cases other than.” In other words, a refund is contemplated in the situations provided in clauses (i) and (ii) and no other. To put it differently, the first proviso can be recast, without altering its meaning to read that a refund of unutilised ITC shall be allowed only in the cases governed by clauses (i) and (ii). …”
It is material to note that Clause (ii) of proviso to sub-section (3) of Section 54 of the CGST Act, 2017 is applicable only where ITC has accumulated on account of “rate of tax on inputs being higher than the rate of tax on output supplies” i.e. Taxable person is unable to fully utilize the ITC on its inputs.
Now, the questions that has been arises for consideration are
1. Whether refund of accumulated ITC is proscribed (restricted) by virtue of Clause (ii) of the proviso to Section 54(3) of the CGST Act, 2017 in case where the input and the output are the same? [i.e. inward supply and outward supply are for the same products];
2. Whether rate of tax on the principal input has to be compared with the rate of tax chargeable on the principal output supply? [There may be case where the taxable person uses various items in production of principal product]
The answers of the aforesaid questions have been settled in W.P.(C) 10222/2023 & CM No.39561/2023 –Indian Oil Corporation Limited vs. Commissioner of Central Goods and Service Tax Ors. (dated 05.12.2023) wherein the Hon’ble Delhi Court has held that –
It is important to note that Clause (ii) of Section 54(3) of the CGST Act, 2017 does not proscribe the grant of refund where the input and the output are the same. Clause (ii) of proviso to sub-section (3) of Section 54 of the CGST Act merely restricts the refund of unutilized ITC to cases where there is accumulation of unutilised ITC on account of rate of tax on inputs being higher than the rate of tax on the output supplies.
Clause (ii) of proviso to sub-section (3) of Section 54 of the CGST Act does not contemplate comparing rate of tax on the principal input with the rate of tax chargeable on the principal output supply. There is neither any reason nor any scope to further confine the refund of unutilised ITC only to cases where the rate on main input is higher than the rate of tax on the principal output.
In this case, the bulk LPG used as the principal input, as well as bottled LPG supplied by the petitioner, are chargeable at the rate of 5%. However, the petitioner also uses various other items in the production of bottled LPG, which includes accessories required for the purpose of safety. The said items are chargeable to varying rates of GST. The petitioner’s claim for refund was denied on the ground that the bulk LPG as well as bottled LPG is the same product chargeable to GST at the rate of 5%. The Adjudicating Authority held that in the circumstances, the petitioner’s case is not one of inverted duty structure and therefore, the refund is proscribed in terms of Clause (ii) to Section 54(3) of the CGST Act. The Adjudicating Authority referred to the Circular No.135/5/2020-GST dated 31.03.2020 (hereafter also referred to as ‘Circular No.135/5/2020’) and noted that in terms of Clause (ii) of the proviso to Section 54(3) of the CGST Act, the refund of ITC is impermissible in cases where input and output supplies are the same.
The Hon’ble Delhi High Court in the aforesaid matter, has held that it is necessary to bear in mind that one of the principal objects of enacting the CGST Act was to address the cascading effect of taxes as the taxes levied by the Central Government and State Governments were not available for being set off for payment of other taxes. It is clear that the legislative intent behind grant of refund of unutilised ITC that has accumulated on account of inverted tax structure is to confine the tax to the tax on the output supplies at the rate so fixed. In view of the plain language of proviso to Sub-section (3) of Section 54 of the CGST Act, the Revenue’s contention that the petitioner is not entitled to refund of unutilised ITC as the rate of bulk LPG and bottled LPG is the same, is unsustainable. It is impermissible to disregard the rate of tax on other inputs.
In Shivaco Associates and Anr. v. Joint Commissioner of State Tax, Directorate of Commercial Taxes and Ors. 2022 SCC On Line Cal 459, the taxpayer was engaged in supplying LPG in containers. The tax on bulk LPG (input supply) was chargeable at 18% but the tax on output supply being LPG containers for domestic consumers was 5%. The Revenue had denied the refund of ITC accumulated for the aforesaid reason on the ground that the input and the output supply was the same. The Calcutta High Court accepted the petitioner’s claim and rejected the Revenue’s contention that refund was not admissible by virtue of the Circular 135/05/2020. The Court held that any circular issued under Section 168(1) of the CGST Act “cannot supplant or implant any provision which is not available in the Act”. The Circular could not restrict release of benefits as provided under the CGST Act. The Court held as under:
“26. In the present case, the Act does not mention about non-granting of the benefit of accumulated input tax credit where the input and output supplies are the same. The circular is trying to restrict the refund to a particular set of supplies. The circular is trying to create a class inside the class, which is impermissible. According to the Act, refund is permissible in respect of all classes where the input tax is higher than the output tax. By way of the circular, the Board is curtailing the said benefit and making refund permissible only if the input and output supplies are different. The same amounts to overreaching the provisions as laid down in the Act.
27. It cannot be said that the legislature was unmindful of the fact that there may be instances where the input and output supplies are the same. On the contrary, it can be said that the legislature consciously did not create any distinction for allowing refund in all cases where the input tax is more than the output tax. The said benefit is applicable to all similar cases.”
In Baker Hughes Asia Pacific Limited v. Union of India 2022 SCC OnLine Raj 1061, the Hon’ble Rajasthan High Court held that in cases where the refund of accumulated ITC arises on account of the inverted duty structure, the same could not be denied on the ground that the input and output supplies were the same.
In BMG Informatics (P.) Ltd. v. The Union of India and Ors.2021 SCC OnLine Gau2570, the Hon’ble Gauhati High Court held that Circular No. 135/05/2020 is unsustainable and is liable to be ignored.
In the aforesaid matter Indian Oil Corporation Limited vs. Commissioner of Central Goods and Service Tax Ors., the Revenue contended that there was a difference in the rate of tax chargeable on input and output even though the input and output supplies were the same. He contended that therefore, in such circumstances, refund would be admissible under Clause (ii) to proviso to Sub-section (3) of Section 54 of the CGST Act. He argued that no refund would be admissible in the present case as the rate of tax on bulk LPG and bottled LPG was the same. But, the Hon’ble Delhi High Court has found no merit in the revenue contention and allowed the petition.
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