Issue: Whether Refund of unutilized ITC pertaining to input services is allowed under “Inverted duty structure” under section 54 of CGST Act, 2017?

Law: Section 54(3) of CGST Act, 2017 that provides for the refund of unutilized ITC under GST has been reproduced below:

‘54(3) Subject to the provisions of sub-section (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-

(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.’

Additionally, Rule 89(5) of the CGST Rules, 2017 that provides the formula for computation of refund claim pertaining to unutilised input tax credit on account of Inverted Duty Structure has also been reproduced below:

“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) 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;

Case Laws: Reference is drawn to the below mentioned High Court cases:

Sr. No. Name of Case Law. Judgment given by Decision given
1 VKC Footsteps India Pvt. Ltd. Gujarat HC Refund allowed for unutilized ITC pertaining to input services
2 TVL Transtonnelstroy Afcons Joint Venture Madras HC Refund not allowed for unutilized ITC pertaining to input services

Conclusions:

1. VKC Footsteps India Pvt. Ltd

Following important observations have been made by the Judges:

1. Conjoint reading of the provisions of Act and Rules, it appears that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGST Rules, 2017 to exclude refund of tax paid on “input service” as part of the refund of unutilized input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act, 2017 which provides for claim of refund of “any unutilized input tax credit”.

2. The word “Input tax credit” is defined in Section 2(63) means the credit of input tax. The word “input tax” is defined in Section 2(62), whereas the word “input” is defined in Section 2(59) means any goods other than capital goods and “input service” as per Section 2(60) means any service used or intended to be used by a supplier. Whereas “input tax” as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus “input” and “input service” are both part of the “input tax” and “input tax credit”. Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act, 2017, the legislature has provided that registered person may claim refund of “any unutilized input tax”, therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit”. Moreover, clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules 2017.

3. In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018-GST dated 31.12.2018 to deny the registered person refund of tax paid on “input services’ as part of refund of unutilized input tax credit.

4. The respondents are therefore, directed to allow the claim of the refund made by the petitioners considering the unutilized input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.

5. In the result, for the forgoing reasons, the petitions are accordingly allowed. Rule is made absolute to the aforesaid extent. No order as to costs.

Note- The above mentioned case has been appealed against by the Department and the matter is now pending with Apex Court. The final decision was prompted to be given by 28th April 2021; however the same has been postponed due to the ongoing COVID-19 pandemic till further notice.

2. TVL Transtonnelstroy Afcons JV

Madras HC pronounces its conclusion on the batch of petitions on inverted duty structure (IDS) and arrived at the following conclusions:

1. Section 54(3)(ii) does not infringe Article 14.

2. Refund is a statutory right and the extension of the benefit of refund only to the unutilized 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 unutilized input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.

3. Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).

4. Section 54(3)(ii) curtails a refund claim to the unutilized 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.

5. 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.

Author’s Opinion:

1) It is a settled position in law that the Rules made under an Act cannot override the Act. Thus Explanation (a) to rule 89(5) cannot override the provisions of section 54(3) of the CGST Act, 2017.

2) Reference is also drawn to the explanation to Rule 89(4) that provides the definition of “Net ITC” for the purpose of claiming refund of unutilized input tax credit on account of Zero rated supplies without payment of tax, which includes the ITC pertaining to both input and input services. Thus, it can be said that it has been the intention of the Government to provide the refund on input services in case of refund claim filed as per the provisions of rule 89(4). Thus, drawing analogy from this, the denial of refund on input services in case of refund claim filed as per the provisions of rule 89(5) does not hold good.

3) Thus in my personal opinion, the refund on input services should not be denied. However, since the denial is explicitly coming from the rule itself, The Authorities are rejecting the refund claim on input services making this is a highly litigative matter. Thus till the time the rule is amended or final judgement is given by the Supreme court in the matter of VKC Footsteps, the taxpayers will have to litigate this matter in case they consider filing of refund claim excluding ITC on Input services as well.

Author Bio

Qualification: CA in Practice
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Location: Nagpur, Maharashtra, India
Member Since: 28 Jun 2021 | Total Posts: 1

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4 Comments

  1. Sachin Khilwani says:

    Please note As per the landmark judgement of Hon’ble Supreme court “no refund will be allowed on input services under IDS”. So now this is a settled position in law!!

    1. Sachin Khilwani says:

      Please note As per the landmark judgement of Hon’ble Supreme court “no refund will be allowed on input services under IDS”. So now this is a settled position in law!!

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