ARE THESE PROVISIONS AGAINST THE CLARION CALL OF HONOURABLE PRIME MINISTER TO CREATE AATMA NIRBHAR BHARAT ABHIYAN?
In this article we would understand following:
1. Constitutional validity of restricting refund of GST on capital goods and services.
2. The legality of WHO, WHEN and WHAT can be claimed as refund.
So, for analysing its constitutional validity we must understand the provisions stated in the relevant article which helps the assessee to claim the refund in case where law extinguishes the right of the assessee.
According to Article 300A of the Constitution of India – The credit standing in favour of an assessee is property and the assessee could not be deprived of the said property save by authority of law in terms of article 300A of the Constitution of India.
Relevant extract of Article 300A- Persons not to be deprived of property save by authority of law of the Constitution of India is as under:
No person shall be deprived of his property save by authority of law.
Article 300A states that – No person shall be deprived of his property save by the authority of law. Therefore, the article protects an individual from interference by the State and dispossess a person of the property unless it is in accordance with the procedure established by law
From the above we could conclude that this Constitutional article helps the assessee to claim the refund in case law extinguishes the said right to property of the assessee. Therefore, we must analyse the relevant extract of law to understand the fact whether law extinguishes the right of the registered person while claiming the GST refund under Inverted duty structure or not which are as under:
1. Section 54(3) – Refund of Any Unutilised Input Tax Credit.
2. Definition of refund under Section 54(3)
3. Rule 89(5).
4. Relevant extract of Circular No 125/44/2019-GST dated 18.11.2019.
5. Relevant extract of Circular No. 135/05/2020-GST dated 31.03.2020
Analysis of Section 54(3)- Refund of Any Unutilised Input Tax Credit with the objective to know Who, When and What can be claimed as refund.
Subject to the provision of subsection (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–
- Zero-rated supplies made without payment of tax;
- 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 subject to export duty:
Provided also that no refund off input tax credit shall be allowed, if supplier of goods hey or services or both avails drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
Explanation. —For the purposes of this section, —
- “refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3)
On the analysis of above section, we have following question and answers which would help us to understand the above section:
Q 1. Who can claim refund?
Ans: A registered person may claim the refund.
Q 2. When can we claim the refund of unutilised input tax credit?
Ans: Unutilised input tax credit can be claimed as refund when either we have following two cases:
- Zero Rated supplies made without payment of tax.
- 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.
This provision states that we can claim the refund of unutilised input tax credit and does not restrict the refunds to inputs. Intent of legislature while drafting the Act is absolute clear that when to refund unutilised input tax credit.
Q 3. What can be claimed as refund?
Ans: Unutilised input tax credit can be claimed as refund under following cases:
- Zero Rated supplies made without payment of tax:
- 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;
Now it is important to understand the meaning of unutilised input tax credit as definition of refund prescribed in this section also specifically includes the refund of unutilised input tax credit as provided under sub-section (3).
The term input tax credit has been defined under section 2(63) which means the credit of input tax.
Whereas input tax has been defined under section 2(62) which has been defined as under:
“input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods.
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9.
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act.
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy”
Conclusion of Analysis of Section 54(3)
On the analysis of the above we could conclude that definitions defined under the Act has not differentiated between:
- the input tax credit on inputs,
- input services and
- capital goods.
which means input tax credit includes inputs, input services and capital goods.
As well as act clearly defines who, when and what can be claimed as refund.
Who – Registered person.
When – (a) Zero rated supplies made without payment of tax.
(b) 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).
What – Refund of unutilised input tax credit.
Analysis of Rule 89(5)
In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: —
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services.
Explanation: —For the purposes of this sub-rule, the expressions—
(a)Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both; and
(b)”Adjusted Total turnover” and “relevant period” shall have the same meaning as assigned to them in sub-rule (4).
E)”Adjusted Total Turnover” means the sum total of the value of-
(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and
(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding-
(i)the value of exempt supplies other than zero-rated supplies; and
(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any, during the relevant period.
(F) “Relevant period” means the period for which the claim has been filed.
On the analysis of above rule, we have following question and answers which would help us to understand the above section:
Q 1. What is turnover of inverted rated supply of goods and services under Rule 89(5)?
Ans: Turnover of inverted rated supply of goods and services in case where the rate of tax on output supplies (other than nil rated or fully exempt supplies) is lower than the rate of tax on inputs procured.
Q 2. What is Net ITC under Rule 89(5)?
Ans: Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both.
Q 3. Does the restriction impose on Input tax credit on capital goods and input services is ultra vires to section 54(3)?
Ans: Yes, the restriction impose on Input tax credit on capital goods is ultra vires to section 54(3) since the same section has not differentiated between:
- the input tax credit on inputs,
- input services and
- capital goods.
which means input tax credit includes inputs, input services and capital goods.
Analysis of Relevant extract of Circular No. 125/44/2019-GST dated 18.11.2019
Clarification on calculation of refund amount for claims of refund of accumulated ITC on account of inverted tax structure
53. Sub-section (3) of section 54 of the CGST Act provides that refund of any unutilized ITC may be claimed 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). Further, sub-section (59) of section 2 of the 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. Thus, inputs do not include services or capital goods. Therefore, clearly, the intent of the law is not to allow refund of tax paid on input services or capital goods as part of refund of unutilized input tax credit. It is clarified that both the law and the related rules clearly prevent the refund of tax paid on input services and capital goods as part of refund of input tax credit accumulated on account of inverted tax structure.
On analysis of above clarification, we have following question and answers which would help us to understand the above clarification:
Q 1. How to interpret the word “where”?
Ans: As per the common understanding and interpretation the word “where” represents to situation or circumstance when the refund would be due and does not mean what will be given as refund.
Q 2. Does clarification contradictory to Section 54(3)?
Ans: Yes, above clarification is contradictory to 54(3) as the said section clearly states that we can claim the refund of unutilised input tax credit when 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).
Q 3. Does clarification contradictory to Rule 89(4) – refund of input tax credit in case of zero-rated supply of goods or services or both without payment of tax under bond or LUT?
Ans: Yes, above clarification is contradictory to 89(4) as the said rule provide us the refund of input services also by including inputs and inputs services in the meaning of Net ITC.
Relevant extract of meaning of Net ITC is as under:
Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both.
Analysis of Relevant extract of Circular No. 135/05/2020-GST dated 31.03.2020 – Non applicability of refund of accumulated input tax credit on account of reduction in GST rate due to different tax rates at different points in time.
3. Refund of accumulated input tax credit (ITC) on account of reduction in GST Rate
3.2 It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.
On analysis of above clarification, we have following question and answers which would help us to understand the above clarification:
Q 1. At what point of time the refund of accumulated input tax credit (ITC) on account inverted duty would arise?
Ans: When the output supplies of goods or services are made at lower tax rate when compared to the tax rate of inputs which are at higher rate.
Q 2. Does clarification contradictory to Section 54(3)?
Ans: Yes, above clarification is contradictory to 54(3) as the said section clearly states that we can claim the refund of unutilised input tax credit when 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).
This section does not exclude the situation, where the inverted duty happens due to reduction in GST rate at different points in time as the said section states the point of time by mentioning that the refund on account of unutilised credit would happen when the output is being sold at lower rate when compared to rate of inputs being used.
Conclusion
While the government has power to levy tax when the legislation is passed by the Parliament, it should also equally be mindful that any blockage of refund results into increase in cost. In case of inverted duty structure, by restricting the refund on capital goods and services, the government has enhanced the effective cost particularly in the hands of manufacturers. For instance, LED light is taxed at 12% whereas the manufacturer pays rent and contracted labourers with 18% GST. In the manufacturing sector, which is capital intensive as the manufacturer is expected to put smart plant and machinery to get the scale advantage and also labour intensive, paying GST at higher rate and not being able to get a refund of the same only increases its cost and makes them uncompetitive in this world of ever increasing competition.
This methodology adopted by the government to block refund of GST on account of capital goods and services appears to have gone against the interest of our domestic manufacturing industry. This approach, unfortunately, is also against the clarion call of honourable Prime Minister to create Aatma Nirbhar Bharat Abhiyan. We are aware that expansion and competitiveness of our domestic manufacturing industry will certainly be a winning formula as it generates jobs and helps in export growth. It is in that interest; GST Act should be amended to allow refund on capital goods and services in case of inverted duty structure.
One is also curious to know whether this blockage of refund, as it stands in the existing provisions today, will survive the scrutiny of the court, if challenged, as prima facie the government has encroached on the property of the taxpayer by extinguishing his right to claim refund which is apparently his rightful claim.
Author Bio
A good analysis…