Recently in the case of VKC Footsteps vs. Union of India [2020-TIOL-1273-HC-AHM-GST] the Gujarat High court has held that Rule 89(5) of the CGST Rules, 2017 is Ultra Vires as it is inconsistent of Section 54(3) of the Parent CGST Act, 2017.The issue examined here was whether it was correct to deny the Refund of Input Services in cases of Refund of Inverted Duty? To answer this question the Hon`ble Court had also to examine the Doctrine of Ultra Vires as it applies to Rules which are inconsistent with their Parent Acts. Rules, as we know, are delegated legislation which is performed by the Executive which have to be consistent with the Parent Act passed by the Legislature.

Refund of ITC under GST Law

As we know, Zero Rated Supplies are those which are Exports or supplies to Special Economic Zones (SEZ). In cases of an Inverted Duty Structure, where the duty of the inputs is more than that of the output supplies made by an supplier it is inevitable that some Unutilized ITC would accumulate in the Electronic ITC Ledger of the Supplier. In the absence of any avenue of utilizing this ITC, it would appear as a ’Liability’ in the Balance Sheet of the Supplier and such a burden would inevitably be passed onto the ultimate consumer. Hence, the Refund can be given by the designated authority of such ITC by applying FORM RFD-01 online, Quarterly or Monthly as the case maybe.

Section 54 (3) of CGST Act, 2017 vs. Rules 89(5) of CGST Rules, 2017

The issue which was before the Hon`ble Court was whether Rule 89(5) of the CGST Rules, 2017 is inconsistent of Section 54(3) of the Parent CGST Act, 2017 and is hence Ultra Vires.  The Central Government, while making the Rules to deny the same in the wordings of Rule 89 (5) in Chapter-X of the CGST Rules, 2017:

“(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) x 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-rules (4A) or (4B) or both;

Here, the explanation states that Net ITC includes ‘inputs’ and deliberately omits the use of   ‘input services’. In GST Act,  ‘inputs ’ as defined in Section 2(59)  includes only  input goods other than capital goods and not input services which are defined separately in Section 2(60) of the Act .Hence, we see that in cases of Inverted duty structure the Refund of accumulated ITC of Input Services would be denied of we were to us the formula given in Rule 89(5).

Now, considering  Section 54(3) of the CGST Act, 2017 , we see that Refund of Unutilized Input Tax Credit (ITC) can be given in only  two circumstances  , namely:

(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:

We can also consider the definition of input tax and input tax credit as given in the CGST Act:

2(62) –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 subsections (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;

2(63) input tax credit, means the credit availed on input tax

Hence, we see that the restrictions on Net ITC in the Rules for inverted duty structure have not been found in Act itself.


As per the concept of Ultra Vires, no taxation can be beyond Article 265 –“No tax can be levied, except for the authority of law”. The unique constitutional amendments made post the 117th CA, 2017 where both Sate and Centre can levy tax on the supply of both sales and goods has created a unique arrangement for GST. Also, Section1 64 of the CGST Act empowers the Central Government to make Rules for the carrying out the provisions of the Act. Hence, the CGST Rules have to be in concurrence of the CGST Act, 2017.

The contention of Revenue was that since the Rule making power of the Central Government has already been affirmed by the Hon`ble Gujarat High Court in the case of Willowwood Chemicals Pvt. Ltd. vs. Union of India in SCA No.4252 of 2018 rendered on 12th / 19th September 2018 2018-TIOL-2873-HC-AHM-GST  it was now a legitimate exercise of power by the Central Government to have created conditions on the availing of Refund in the case of Inverted Duty Structure.

But the Main contention put forward from the party was not that the Central Government did not have the power to make rules on the issue of Refund but that such a Rule made should have been consistent  with the Act itself and in case of any inconsistency between the two it was the Rule which would be held illegal.


It was held by the Hon`ble High Court that there is no restriction on the availig of ITC in the CGST Act itself. Also, Section 54 (3) (ii) mentions that refund would be allowed on accumulated ITC in the case of inverted duty structure. The only restriction given here is that of Section 54 (10) which mandate two conditions of GST Returns having been filled and deduction of any previous dues of the assessed from the amount of Refund. Hence, the Court by a very plain reading of the Section has found certain portions of Rule 89 (5) which are not consistent with this Section.

Author Bio

Qualification: Graduate
Company: Indian Revenue Service (C&IT)
Location: Mumbai, Maharashtra, IN
Member Since: 21 May 2020 | Total Posts: 7

My Published Posts

More Under Goods and Services Tax

One Comment

  1. Deepak Goel says:

    Section 54(3)(ii) says

    where the credit has accumulated on account of rate of tax on inputs ………….

    Thus, only inputs specified in section itself, so how Rule 89(5) inconsistent

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

January 2021