pri Refund of ITC on Input Services-  Logic defies the Lawgic Refund of ITC on Input Services-  Logic defies the Lawgic

Matter to be analysed- Gujarat High Court allows the refund of unutilized ITC on Input Services.

Ever since the advent of GST the refund of ITC has been a matter of grave concern and a tussle for the taxpayer to get it conveniently from revenue authorities who are busy jostling for ramping up the collection, rationalizing tax structure, compensating states for GST rollout and if something’s left, to pay to the taxpayer after lot of brain storming on how to weed out the fraudulent demands. There has always been confusion on refund of ITC accumulated on account of Inputs and Input services with the tax payer. It was a stunning discovery to see that even many of professional people also in dark about the eligibility of refund on Inputs and Input Services which many people used to think to be one and the same thing as far as refund provisions are concerned. Amid all this gung ho, the recent judgment of hon’ble Gujarat High Court in the case of M/s VKC Footsteps India Pvt. Ltd. VS Union of India & 2 Others, has set the cat among the pigeons and likely to have wider ramifications and may prompt the GST authorities to run for the hills or their money besides making tax payers emboldened to stake a claim for the refund of unutilized ITC on input services as well. This discourse is aimed at the critical analysis of the above judgment in the light of the GST provisions.

To understand the procedure of input, it is necessary to go through the provisions of CGST Act which are as follows:

Input– Section 2(59) defines Inputs to be the Goods other than Capital goods used or intended to be used by supplier in course of or furtherance of business.

Input Service-Section 2(60) defines Input Services to be any Service used or intended to be used by supplier in course of or furtherance of business.

Section 16– This section provides for the conditions subject to which the taxpayer becomes entitled to take Input tax credit on inputs or Input Services as mentioned above.

Section 17– This section provides for restrictions on availment of ITC.

Section 41-This section provides for provisional availment of ITC based on GST return filed u/s 39.

Section 54– This is the section, read with Rule 89, providing for the refund of the Tax, interest, penalties etc. as well as refund of the Unutilized Input Tax Credit (ITC) on zero rated goods supplied without payment of tax and on INPUTS. This sub section is reproduced below:

3) Subject to the provisions of sub-section (10), a registered person may claim a refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of the 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:”

As such, this sub section becomes the bone of contention between the tax payer and the GST authorities causing a huge hue and cry over the  refund of unutilized ITC on Input Services also.

The proviso to above section categorically provides that the refund is allowed based on inverted duty structure on unutilized ITC of INPUTS only. It is not hard to discern the intention of legislature behind excluding Input Services from the ambit of section 54 as the ITC component on input services such as repair & maintenance, job work, works contracts, software AMCs etc. is most likely to be dominating in providing outward supplies. So, in my view to restrict the excessive flow of refund on account of unutilised ITC on Input services may be the motive behind incorporating such contentious covenants in the refund provisions of GST laws itself.  In this regard I appreciate the exceptional steps taken by the high court in allowing the refund of unutilized ITC on input services.

Logic of the Taxpayer contesting the case:

The Petitioners, therefore, prays that this Hon’ble Court may be pleased to:

(a) hold that the amended Rule 8 of the CGST Rules is ultra vires Section 54(5) in as much as Section 54(3) provides for refund of ‘any unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both ‘inputs’ and ‘input services’;

(b) hold that the amended Rule 89 of the CGST Rules is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently;

(c) hold that Section 164(3) is unconstitutional inasmuch as it suffers from the vice of excessive delegation;

The petitioner put stress on the fact that the section 54(3) itself provides that any ITC can be refunded besides explaining the definitions of ITC, Input and Input Services. However, which putting forth the argument, the taxpayer did not appreciate the fact that the section 54(3) is qualified by a proviso which puts condition as to the eligibility of refund only on Inputs and as such forms the very part of the section itself i.e the principal legislation framed by the parliament.

What does the Law-gic say:

It is the settled proposition of the law that under any law the delegated legislation cannot override the principal law or the constitutional provisions. Hence, the rules are to be framed strictly within the confines of the principal legislation confirming to the values enshrined in the constitution of India.

The Hon’ble Gujarat High Court has also affirmed the above proposition in its order which in details has analysed the abovementioned terms viz. input, input services, input tax credit etc. and has analysed that rule 89(5) and explanation (a) thereto is contrary to and ultra vires to the principle legislation i.e section 54(3). And as such, allowed the claim of taxpayer to have refund of input tax credit on input services as well.

Now at the cost of being hostile to the common taxpayer intention, albeit being a professional, and at the same time appreciating the much needed cure provided to the taxpayers by Gujrat High Court, I shall submit that the rule 89(5) here cannot be said to be ultra vires the section 54(3) as this very section provides by way of proviso therein that the refund of unutilized ITC cannot be allowed in case of Input services only. And as per common understanding, provisio, explanation, illustrations etc form the very part of the statute itself and have the same authority as they elaborate the provisions of the relevant statute.

The Taxpayer and the high court both here put stress on the words “ any unutilized input tax credit” in sub section (3) while ignoring the force of the proviso just beneath the para containing above words which restricts the scope of refund of unutilized ITC in respect of Input services.  As such, giving a separate and opposite interpretation of the two different lines of same statute does not seem justified as the whole section needs to be read into its entirety to arrive at harmonious construction thereof.  Therefore, in the light of above fact, I take a dare upon myself to submit that the contention of the parties here does not seem correct as the principal law itself provides for restriction on such refund and the abovementioned rule just lays down the procedure to complement what is written in law itself and is not ultra vires the law.

However, appreciating the leeway for the taxpayers I assert that this restrictive covenant in section 54(3) can be cured by way of amending the section itself by the competent legislatures whose intention has been to curb the excessive refunds of ITC on Input services. The matter is still open to dispute and may be contested in Apex court by the central government itself. Till then its good to enjoy the bounty bestowed by the Gujarat High Court.


The above discourse is the product of my bare reading of the provisions of section 54 (3) and other terms of the CGST Act, 2017, analysis of the Judgment and common understanding of law. Any disagreement therefrom is well appreciated. The opinion expressed here is my personal view and are in no way meant to challenge the wisdom or jurisprudence to the court nor did I intend to be hostile to the interests of taxpayers.

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July 2021