Under the Central Goods and Services Tax Act, 2017 normally, the refund provisions under Section 54 of the Act applies in the following cases :-
1. Zero Rated Supplies (Exports to a country outside India & Supplies to SEZ).
2. Inverted Tax Rate Structure.
“Inverted Tax Rate Structure” means a situation when there is accumulation of unutilized input tax credit, wherein GST rate on ‘inputs’ is higher than the GST rate on outputs. For example, Mr. Ashish is the manufacturer of plastic bags. He pays GST of Rs 1,00,000 on the purchase of raw materials (raw pulp) at 18%. After carrying out the manufacturing process, the finished product (plastic bag) is sold. Tax payable on the same is Rs 80,000 which is chargeable at 12%. Mr Ashish is paying more GST on the input materials than the GST which is chargeable on the final product.
In the wake of this, the need of refund of unutilized accumulated Input tax credit (ITC) arises. The GST law allows the registered person to claim a refund of unutilized ITC under Section 54(3) of the CGST Act, 2017 read with Sub Rule 5 of Rule 89 of the CGST Rules, 2017.
However, there exists certain exceptions to claiming a refund of unutilized ITC under GST law, wherein the registered person is not allowed to claim ITC Refund on account of an inverted tax rate structure in certain cases. These cases are listed below;
MAXIMUM ELIGIBLE REFUND AMOUNT:
As per Sub-rule (5) of Rule 89, of the CGST Rules, 2017 “Maximum Eligible Refund Amount” for Inverted Tax rate Structure is based on the following formula:
Maximum Refund Amount = [(Turnover of the Inverted Rated Supply of Goods and Services) x Net ITC/Adjusted Total Turnover] – Tax Payable on such Inverted Rated Supply of Goods and Services.
*Net ITC means 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;
*Adjusted Total Turnover means the sum total of the value of-
(a) the turnover in a State or 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.
*Tax Payable on such inverted rated supply of goods means tax payable on such inverted rated supply of goods under the same head, i.e., IGST, CGST, SGST (Not defined anywhere in the Act or the Rules, however, same is mentioned in the User Manual on GST Portal for filling Refund Application).
*Relevant Period means the period for which the refund claim has been filed.
LET US UNDERSTAND IT WITH ANOTHER PRACTICAL EXAMPLE:
1. Purchase value of raw material A which is used for manufacture of Finished Good X which is taxed at 5% – Rs 2,00,000, GST @12% = Rs 24,000
2. Purchase value of raw material B which is used for manufacture of Finished Good Y which is taxed at 18% – Rs 1,00,000 GST @18% = Rs 18,000
3. Net ITC = Rs 42,000 (24000 + 18000)
1. Sale Value of Finished Good X = Rs 3,00,000 (Turnover of inverted rated supply) GST @5% = Rs 15,000
2. Sale Value of Finished Good Y = Rs 2,00,000 GST @18% = Rs 36,000
3. Total Turnover = Rs 5,00,000 (3 lakhs + 2 lakhs)
= (42000 * 3 lakhs / 5lakhs) – 15000= Rs 10,200
AMBUIGITY IN MEANING OF “INPUTS” AWAITS FINALITY:
Section 54 of the CGST Act, 2017 allows businesses to claim refund of taxes paid on ‘inputs’, without any differentiation between goods or services. The refund can be claimed by filing Form RFD-01A within a period of two years from the end of the financial year in which the claim arises.
Here, problems started emerging when the government amended the CGST Rules 2017 vide N/No. 15/2017 CT (R) dated 28/06/2017 and further, by issuing Circular No. 79/53/2018-GST dated 31.12.2018 to exclude the tax paid for ‘input services’ from the scope of ‘net input tax credit’ used for computing the refund amount. That prompted a bunch of petitioners to challenge the validity of the amendment.
But now, as a sigh of relief to the industry, a landmark judgement was given by Hon’ble Gujarat High Court on refunds on account of inverted tax rate structure in the case of “VKC Footsteps India Pvt. Ltd. Vs. Union of India” vide order dated 24/07/2020. Wherein it was observed by double bench comprising of Justice JB Pardiwala and Bhargav Karia that disallowing refund of the tax paid on input services is contrary to the Central Goods and Services Tax Act. Thereby declaring Rule 89(5) of CGST Rules ultra vires the provisions of Section 54(3) of CGST Act, which denies the refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit’ accumulated on account of inverted duty structure. The Hon’ble Court held that refund of GST paid on ‘input services’ shall also be considered for the refund calculation under Rule 89(5) of CGST Rules.
As per Article 14 of Constitution of India, claiming of ITC is a vested right of the taxpayer, since the transitional tax credit is a property vested with the taxpayer, he cannot be deprived of it, unless otherwise specified by law. Although this ruling will provide partial relief to businesses facing liquidity crunch, but full benefit of this ruling can only be reaped by including the benefit for the financial year 2017-18. Hence, final relief to honest taxpayers will be awaited, till this issue attains finality on final decision of the Hon’ble Apex Court.