Reversal of ITC related to Fabric accumulated due to inverted duty structure

According to natural law of justice if you are paying something you must get something in return or benefits out of it. In GST law, if a registered person paying for something to a registered person he must get the benefit of input tax credit with few exception i.e. supplies u/s 17(5) and few more. In case of supply of notified fabrics after giving the right to avail benefit of input tax credit, right to utilise the same has been snatched by the Government by issuing notification and circular. Detailed discussion on the same is as follows:

Brief summary of the provisions:

According to the provisions of section 54, refund of ITC under inverted duty structure i.e. ITC accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies is allowed. Section 54(3)(ii) empower the Government to notify goods or services on which refund under inverted duty structure is not allowed. Government notify various fabrics and railway related products by issuing following notifications:

1. Notification 05/2017- CGST(Rate) dated 28th June 2017Notified 7 rows related to fabrics and 8 rows related to railways and railways parts on which refund is not allowed.

2. Notification 29/2017- CGST(Rate) dated 22th 2017- Notified 1 fabric on which refund is not allowed.

3.Notification 44/2017-CGST(Rate) dated 14th November 2017Notified 3 fabric items on which refund is not allowed.

On 26th July 2018 Government issued notification No. 20/2018-CGST(Rate) u/s 54(3)(ii) to notify the following provisions:

1. Remove the restriction on claim of refund of input tax credit under inverted duty structure.

2. To lapse balance of accumulated input tax credit after payment for the month of July 2018 in relation to the notified fabrics.

Late circular No. 56/30/2018 dated 24th Aug. 2018 was issued to clarify the following doubts raised:

1. Whether notification 20/2018 seeks to lapse all the credit lying unutilised after payment of tax upto the month of July 2018?

Clarification: ITC related to notified fabrics after payment of outward liability related to notified fabric shall be lapse. Same can be understand by following formula:

Turnover from notified fabric *Total ITC of inputs   

 Total turnover including notified fabric

1. Outward Liability on Notified fabric

2. Whether unutilised ITC in respect of service and capital goods shall also be disallowed?

Clarification: Notification 05/2017, 29/2017 and 44/2017 impose restrictions only on  inputs hence there is no disallowance or lapse of credit of services and capital goods.

3. Implication to fabric like cotton and silk where there was no inverted duty structure?

Clarification: Notification 20/2018 provide for lapsing the ITC related to notified fabrics only. In case of cotton and silk which are not notified fabrics there is no need to reverse the input tax credit.

4. Whether accumulated ITC in respect of exports shall also be made to lapse?

Clarification: Refund of ITC on export is separately determined under rule 89(4) and Notification 05/2017 does not impose any restriction of refund on zero rated supplies. Hence ITC will not lapse in respect of export. In the above formula Turnover of notified fabric shall not include turnover from export of notified fabric.

Late circular No. 94/13/2019 dated 28th Mar. 2019 was issued to clarify the following doubts raised:

While filing RFD-01A validation check error accured because ITC in statement-1A is higher than the amount availed in GSTR-3B due to reversal of ITC according to notification 20/2018-CGST(Rate).

Clarification: File application in “any other” tab instead of inverted duty structure with all forms, documents as to be filed with inverted duty structure application. then proper office shall compute the amount of refund on its own and take action accordingly.

What if registered person yet to perform the reversal.

Clarification: Reverse the ITC through subsequent GSTR-3B or DRC-03 along with interest from due date of GSTR-3B upto the date of reversal.

According to the above provisions every registered person having accumulated input tax credit related to notified fabric after payment of tax for the month of July 2018 shall be lapse. It means ITC once available shall be reversed.

Against above provision registered persons effected by the above provisions have sought Advance ruling from Advance ruling authority and filed writ petitions in high court. Detailed discussion on the same is as followings:

Advance Ruling: Uttranchal Filament (India)-AAR Uttrakhand, AAR No. 02/2019 date 12th June, 2019

Question raised by the applicant is “Whether the meaning of word ‘lapse’ in Notification No. 20/2018-Central Tax (Rate) would mean lapse for refund or lapse for utilization of input tax credit for payment of output tax liability?”

AAR pronounced that “Notification 20/2018-CGST(Rate) dated 26th July 2018 is issued u/s 54(3)(ii) which dealt with refund provisions only. Proviso inserted through notification 20/2018 has to be read with the principal part of the notification only i.e. section 54 “Refund” only. Hence word lapse deals with refund only not with utilization of input tax credit.

 Gujarat high court decision: Shabnam Petrofils private limited V/s Union of India dated 17/07/2019:

Name of the applicants: Wirt petition being filling by a society representing its members and an Association of person.

Question Raised: Question has been raised to quashing and setting aside notification 20/2018, Notification 05/2017 and circular 56/2018 as contrary to section 54(3) and declare them violative of articate 14 & 19(1)(g) of constitution of India.

Applicant: Right to claim input tax credit arise from section 16. There is no provision under CGST act empowering authorities to issue notification providing for lapsing of ITC. Section 54(3)(ii) empower to notify goods and services not entitle for refund under inverted duty structure.

Applicant also referred the various case laws including “Shri Vijaylakshmi Rice Mills V/s State of M.P. (SC)- AIR 1976 SC 1471”, “Govinddas V/s Income tax officer- AIR1977(SC) 552” which provides that “Statue should not be construed so as to create new duties in respect of transactions which were complete at the time of amending the act. Right acquired as a result of operations of statutory provisions can’t be taken back retrospectively unless the statutory provisions so provides.”

Applicant also referred the “Eicher Motor Ltd. V/s Union of India, 1999 (106) ELT 3 (SC) which provides that Right of ITC accrued on date when tax on raw material or inputs paid and that right would continue until the facility thereto gets worked out or goods existed.

Revenue: Power to lapse ITC inherited from power to deny refund. Before effectiveness of notification 20/2018 assessee was unable to take input tax credit of input. Allowing utilization would have allowance of blocked credit & earlier position.

Revenue also referred the case law “Kapil mohan V/s Commissioner of Income tax 1999 (1) SCC 430” which provides that equity has no role to play in determining eligibility to tax and it is for the legislature to determine the same.

Pronouncement: Court considered the following facts before pronouncing the judgement:

1. Section 54(3)(ii) does not empower the Central Government to frame rule providing for lapsing of the input tax credit.

2. In case of Dallchi karkaria Ltd., a manufacture obtains the central excise duty on raw material immediately it makes the requisite declaration and obtain an acknowledgement and became entitle to use such credit at anytime while make the excise payment. The credit is indefeasible.

3. In case of Eicher motors Ltd., A right accrued to the assessee on the date when they paid the tax on inputs and right would continue until the facility available thereto gets worked out or until those goods exists. Hence authorities can not make rule for it’s lapse.

After considering the above facts, court pronounced that notification No. 20/2018-CGST(Rate) , 05/2017 of CGST(Rate) and circular No. 56/2018 shall be quashed and set aside and declared ultra vires and beyond the scope of section 54(3)(ii). Hence petitioner and members of petitioner are entitle for credit.

Conclusion: We are totally agreed with the judgement. Section 54(3)(ii) does not empower authorities to issue notification for lapsing the input tax credit which is already availed. Hence registered person shall not reverse the input tax credit as per the notifications and the persons already reversed the credit shall avail it back.

Contact: ca.robingarg1@gmail.com

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