The latest judgement of Hon High Court of Madras in the case of Tvl. Transtonnelstroy Afcons Joint venture on refund of input tax credit on account of inverted rate structure is contradictory to the judgement of Hon Gujarat High Court in the case of VKC Footsteps on the same issue. Now this matter is to be settled by the Apex Court.

It is an irony in our country that the taxpayers, professionals and Courts are spending so much time and energy to understand the intention of the legislature! Why the legislation cannot be made in clear cut terms to avoid the requirement of war of interpretations? In the given instance, the provisions of sec 54(3) could have imply said input tax credit on input would be eligible for refund where the GST rate on input is more than that on the outward supply of finished goods, if the intention was to give the refund of credit on input alone. Ambiguity in the tax law is nothing less than breach of trust of the taxpayers. The legislator must practice the writing of law to avoid double negative sentences.

No doubt the legislator has wide power to tax any transactions, on any person without following the equity. But the way in which GST is being drafted, amendments are being made and clarification of the law is being given by way of circulars and its subsequent withdrawals are pathetic. As we all know, only question of law is being referred to High Courts, if the different High Courts understands the particular provisions of the law differently, how can it be a law which a common man is expected to understand and pay his tax?

The recent amendment to section 50(1) is another classic example. The GST Act provides for change in the law can be made upon the recommendation of the GST Council. GST Council recommends for retrospective amendment. Notification is issued for prospective application. Press note clarifies due to technical reasons, notification cannot be issued fore retrospective application, however field formation will recover the interest only on net amount. Are they setting a precedent that press note will prevail over notification? Why can’t they sit for one year without any amendments, study the law thoroughly and in one go the entire law is amended and continued for some years?

The Hon Gujarat High Court, in the case of VKC Footsteps India Pvt Ltd (2020-TIOL-1273-HC-AHM-GST) held that since the provisions of section 50(3) of the CGST Act, 2017 provides for the refund of input tax credit in case the rate of GST on input is more that the rate of GST on outward supply of goods, the refund cannot exclude the credit on input services by way of rule [89(5)]. In other words, the court held that the rule cannot go beyond the provisions in the Act.

Similar matters were pending before Hon Madras High Court (W.P No.8596 of 2019 Batch etc.). In its order dated 21.09.2020, the following are the questions considered by the court and the conclusions arrived.

Questions considered Conclusions arrived
1.  Whether Section 54(3)(ii) infringes Article 14 of the Constitution?

 

Section 54(3)(ii) does not infringe Article 14.
2.  Whether it is necessary to read the word “inputs” in Section 54(3)(ii) as encompassing both goods and services so as to ensure that the said provision is not struck down?

 

Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power
3.  Whether the words input services may be read into the word “inputs” by resorting to the interpretive principle of reading down the statute?

 

4.  Whether the words input services may be read into Section 54(3)(ii) as an exception to the general rule of casus omissus?

 

There is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).
5.  Whether the proviso to Section 54(3) qualifies and curtails the scope of the principal clause to the limited extent of specifying the two cases in which registered persons become eligible for a refund of the unutilised input tax credit?

 

Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.
6.  Whether sub-clause (ii) of the proviso merely stipulates the eligibility conditions for claiming a refund of the unutilised input tax credit or whether it also curtails the entitlement to refund to unutilised input tax credit from a particular source, namely, input goods and excludes input services?

 

7.  Whether the rule making power under Section 164 empowers the Central Government to make Rule 89(5) as amended? As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.
8.  Whether Rule 89(5) of the CGST Rules, as amended, is ultra vires Section 54(3) of the CGST Act?
9.  Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both input goods and input services?

It appears that the above interpretation of sec 54(3) against the intention of the law maker. The purpose of the refund of credit in case of inverted rate structure is to ensure that the taxpayer does not end up paying more tax on his inward supplies than the tax payable on his outward supplies on account of reduced rate on his outward supply. Hope the Apex Court gives the favorable verdict to the taxpayer considering this aspect.

By following the judgement of VKC Footsteps (supra), many would have applied for the refund of accumulated credit on input services and capital goods in case of inverted rate structure. The department shall use the Madras High Court order which is favorable to them and reject the refund application. In such cases, it should be appealed and wait till the final order comes from Apex Court.

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Disclaimer : The views expressed herein are the views of the article writer and cannot be used in framing of opinions or devising methodologies for the purpose of compliance without an independent evaluationvasant.bhat@hiregange.com.

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