Lapse of unutilised input tax credit on account of inverted duty rate structure unlawful as held by  Hon’ble Gujarat High Court in the case of Shabnam Petrofils Pvt. Ltd Vs Union of India.

Legal Provisions

Section 54(3) of CGST Act, 2017 provides for refund of unutilised input tax credit in following 2 circumstances

  • Zero rated supplies of goods and/or services and
  • Where credit has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies (inverted duty rate structure)

Central Government has been vested with the power under section 54(3) of CGST Act, 2017 to notify goods and/or services in respect of which refund of unutilised input tax credit accumulated on account of inverted duty rate structure shall not be allowed.

Consequently, Central Government vide Notification No.5/2017- Central Tax (Rate) dated 28/06/2017 has notified following textile and textile goods in respect of which refund of unutilised input tax credit accumulated on account of inverted duty rate structure shall not be allowed.

S. No.  Tariff item, heading, sub-heading or chapter Description of goods
1 5007 Woven fabrics of silk or of silk waste
2 5111 to 5113 Woven fabrics of wool or of animal hair
3 5208 to 5212 Woven fabrics of cotton
4 5309 to 5311 Woven fabrics of other vegetable textile fibres, paper yarn.
5 5407, 5408 Woven fabrics of manmade textile materials
6 5512 to 5516 Woven fabrics of manmade staple fibres
6A 5608 Knotted netting of twine, cordage or rope; made up fishing nets and other made up nets, of textile materials
6B 5801 Corduroy fabrics
6C 5806 Narrow woven fabrics, other than goods of heading 5807; narrow fabrics consisting of warp without weft assembled by means of an adhesive (bolducs)”
7 60 Knitted or crocheted fabrics [All goods].

However, Notification No.5/2017 Central Tax (Rate) dated 28/6/2017 was amended vide Notification No.20/2018 Central Tax (Rate) dated 26/07/2018 to insert following provisos in it

  • Unutilised input tax credit accumulated on account of inverted duty rate structure on inward supplies received on or after 01/08/2018 in respect of above mentioned textile goods shall be allowed
  • In respect of above mentioned textile goods, unutilised input tax credit accumulated on account of inverted duty rate structure up to the month of July 2018, on inward supplies received up to 31/07/2018 shall lapse.

Landmark judgement on lapse of unutilised input tax credit accumulated upto 31st July 2018

Shabnam Petrofils Pvt. Ltd. versus Union of India – Gujarat HC

The Honourable High Court held the lapse of unutilised input tax credit accumulated on account of inverted duty rate structure up to the month of July in respect of textile goods as unlawful on the following grounds

  • The only power conferred upon Central Government under section 54(3) of CGST Act, 2017 is to notify the goods and services which are not entitled for refund of unutilized input tax credit accumulated on account of inverted duty rate structure.
  • Central Government has no power under section 54(3) of CGST Act, 2017 to grant lapse of accumulated input tax credit lying unutilised in balance on 31/07/2018. In other words, there is no express provision under section 54(3) of CGST Act, 2017 for lapsing unutilised input tax credit accumulated on account of inverted duty rate structure.
  • Input tax credit once validly taken is indefeasible. In other words, input tax credit once validly taken cannot be cancelled in absence of express legal provision for lapsing it.
  • Every assessee holds the right to utilize the input tax credit without any limitation of time. In other words, assessee have a right over unutilised input tax credit accumulated on account of inverted duty rate structure upto 31/7/2018. It is not liable to be cancelled or lapsed.

Conclusion

  • Amendment made to the Notification No.5/2018 Central Tax (Rate) dated 28/6/2018 to the extent of lapsing input tax credit accumulated on account of inverted duty rate structure lying unutilised upto the month of July 2018 on inward supplies received upto 31/7/2018 in respect of textile goods is declared to be unlawful and invalid.
  • Assessee hold a valid right over input tax credit accumulated on account of inverted duty rate structure lying unutilised upto the month of July 2018 on inward supplies received upto 31/7/2018 in respect of textile goods. It is not liable to be cancelled or lapsed.

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