GST Refund in case of Input Services

CA Amit Maheshwari

In accordance with provisions of Section 54 of the CGST Act, no refund of un-utilised input tax credit shall be allowed in cases other than –

i. Zero rated supply 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 exempted supplies)

From the above section, it can be derived that GST Refund can be claimed only in two circumstances,i.e, in case of zero rated supply and inverted duty structure.

A. Zero rated Supply :

As per section 16 of IGST Act, zero rated supply means any of the following supplies of goods or services or both:

(a) Export of goods or services or both; or

(b) Supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone Unit.

B. Output supplies:

As per Section 2(83) of CGST Act, supply in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business.

C. Input:

As per Section 2(59) of CGST Act, Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

D. Input Services:

As per Section 2(60) of CGST Act, Input Service means any service used or intended to be used by a supplier in the course or furtherance of business.

From the above definitions, it can be derived that GST Refund is only available if it is the case of zero rated supply or in case rate of tax on input is higher than the rate of output supply.

The term used in the second case is Input and not Input services. This means, that by this section no refund of input services can be made when rate of of tax on input services is higher than the rate of tax on output supply of goods or services or both.

The cases where this situation can arise are as follows:

i. Output supply rate: 5% /12%: Input service rate: 18%- No Refund can be done for Input services

ii. Output Supply Rate: 5%/12%: Input goods rate: 18%- Refund can be done for Input Goods

Types of Input Services on which input tax is 18%:

i. Rent service

ii. Professional service

iii. Works Contract Service ( Construction)

iv. Financial Services

v. Legal & Accounting services

vi. Maintenance & Repair services

vii. Job work services

The issue has been considered by apex courts and the decisions on the same are as follows:

Gujarat High Court

Case Law: VKC Footsteps India Pvt. Ltd. Vs. Union of India (Gujarat High Court)

The Gujarat High Court directed to allow the claim of the refund of 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.

Thus the Court held that refund of GST paid on ‘input services’ shall also be considered for the refund calculation under Rule 89(5) of CGST Rules.

Madras High Court

Case Law Tvl. Transtonnelstroy Afcons Joint Venture vs Union of India

The Madras High Court held that no refund of ITC on input service on account of inverted duty structure.

It is to be noted that the above judgement is in contraction of judgement passed by Gujarat High Court in the case of VKC Footsteps India Pvt Ltd.

Supreme Court

Union of India & Ors. Vs VKC Footsteps India Pvt Ltd. (Supreme Court of India)

The Supreme Court on its landmark judgement on September 13^th 2021 rejected the order of Gujarat High Court and confirmed the judgement of the Madras High Court, thereby rejecting the refund of input services in the case of inverted duty structure.

The SC considering the complexity of the issue went in the favour of Madras High Court but made recommendation to the GST council the remove this anomaly of law.

Thus, it can be seen from the Honourable Supreme Court judgement that the refund of input service cannot be granted because of the anomaly of law. The court has made recommendations to the GST Council, and it is expected that the council will take note and make necessary changes in the law so that refund of services can be granted.