Refunds have always been an integral part of the Indirect tax regime. In the era Service Tax regime, refunds were granted in the case of export of service. However, with the inception of GST and introduction of multiple tax rates, refunds arose on account of inverted duty structure. Inverted duty structure means a scenario wherein the tax rate on inputs is higher than the tax rate on output, leading to accumulation of input tax credit.

The provisions of the GST law which authorises the taxpayer to claim refund under the Inverted Duty Structure are discussed herein below,

The proviso of section 54(3) of CGST Act provides that no refund of unutilised input tax credit shall be allowed in cases other than, whereas as per clause (ii) of the said proviso “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”

The word ‘Input tax credit’ is defined in section 2(63) as the credit of input tax, whereas ‘Input tax’ as per section 2(62) means the Central tax, State tax, integrated tax or union territory tax charged on any supply of goods or services or both.

On the other hand, Rule 89(5) of CGST rules as amended retrospectively vide notification no. 26/2018-CT dated 13.06.2018 embargo claiming of refund of tax paid on input services as the definition of net ITC only covers ITC credit taken on inputs. Earlier, as originally introduced definition of Net ITC includes ITC availed on input services also.

Further, circular no. 79/53/2018 dated 31.12.2018 also clarified that both the law and rules prevent the refund of ITC claimed on Inputs services and capital goods on account of inverted duty structure as section 54(3) of CGST Act provides refund of any unutilised ITC may be claimed where the credit has been accumulated on account of rate of tax on inputs being higher than the output. The definition of Inputs as per section 2(59) of CGST Act defines inputs as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

The main objective of granting refunds only for inputs is to whittle down the amount of refund claimed.

The above ultra vires provision of Rule 89(5) contrary to the provision of Section 54 had been challenged through filing of writ petition before Honourable Gujarat High Court. The said petition has been disposed of in case of M/s VKC Footsteps India Private Limited vs. Union of India & others.

Judicial pronouncement is summarized as under;

The petitioner vindicates on mainly following broad grounds;

i. Fundamental principal behind introducing GST is that it is multi stage tax and supplier is entitled to credit of taxed paid at anterior stage. The ultimate burden for paying taxes lies on final consumer.

ii. To save distortion of fundamental feature of GST, refund of accumulated unutilised input tax credit shall be allowed where there is between rate of tax paid on final stage and anterior stage.

iii. Section 54(3) itself stipulates that ‘any unutilised input tax credit’ shall be granted as refund. Further, expression input tax credit as defined in section 2(63) means credit of Input tax. Section 2(62) defines input tax as tax charged on any supply of goods and services. Therefore, section 54(3) covers ITC of input services also.

iv. Denial of refund on ITC claimed on input services also violates Article 14 of the constitution of India as it denies vested right created by statue and retrospective amendment of amended rule 89(5) deprive applicant from claiming refund.

The petitioner relied upon the following dictums:

Intercontinental Consultants & Technocrats Pvt. Ltd. Vs. Union Bank of India: Rules which goes beyond the statue is ultra vires and thus liable to be struck down.

Taj Mahal Hotel: “the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.”

Chenniappa Mudaliar: rule which comes in conflict with the main enactment has to give way to the provisions of the Act.

Babaji Kondaji Garad: “Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning too firmly state that the statute prevails over subordinate legislation and the bye-law, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with.”

Key finding of High court:

I. Relied upon the fact of the cases, legal provision, International/VAT guidelines, first discussion paper on GST honourable High Court held that Rule 89(5) of CGST Rules prescribing to exclude ITC credit availed on Input services from Net ITC is contrary to the provision of Section 54(3) of CGST Act which provides for claiming of refund of “any unutilised input tax credit”. The word as defined in section 2(62) means tax charged on any supply of goods or services or both made to any registered person.

II. Further, provision of section 54(3) of CGST Act 2017 refers to ITC claimed on both Inputs and Inputs Services.

III. Further circular no. 79/53/2018 dated 31.12.2018 denying the registered person for claiming refund of Input services in case of Inverted duty structure cannot supressed intent of law for proving refund of any unutilised input tax credit.

Comments: The decision of honourable High court as pronounced is standard. However, the interpretation of proviso of section 54(3) of allowing refund of accumulated ITC denotes only ITC availed on input and input services only or it also covered capital goods.

The other points which looms clarification is the rejection of refund by reckoning the transaction as a trading transaction. Albeit the circular no. 135/05/2020-GST dated 31.03.2020 clarifies that refund of accumulated ITC on account of reduction in rate of tax shall not be granted but the provisions of Section 54(3) creates no such restriction.

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