CA Abhishek Chopra
Can Input tax credit be extinguished through a notification enabling refund of inverted tax?
The Indian Textiles extends from the hand-woven sector on one end to the capital intensive mill sector on the other. The segments include the decentralized power looms, hosiery and knitting sectors; the handloom and handicrafts segments; as also the wide range of fabrics which include man-made fibres, cotton, silk, jute and wool.
Textiles for many decades have been enjoying tax exemption under indirect tax regime and have been part of unorganized economy. However the Textile sector which was seldom taxed in History, was brought under GST with concessional rate on Fabric 5% (subject to the condition that no refund of accumulated INPUT TAX CREDIT shall be allowed on account of inverted duty structure) and textile Job work at 5%.
Apart from input of Fabric there are various other inputs and input services which are integral part of this industry and list of few such item is mentioned below:
3. Packing material
4. Various services
The above mentioned inputs and input services are generally taxed at 18%, whereas the output i.e. fabric is taxed at 5%. This inverted structure creates the accumulation of input tax credit. The Government had initially put specific restriction on claiming the refund of accumulated ITC on below mentioned HSN codes, among others, vide N.N. 5/2017-Central Tax rate dated 28.06.2017.
|Tariff item, heading, sub-heading or Chapter||Description of Goods|
|1.||5007||Woven fabrics of silk or of silk waste|
|2.||5111to5113||Woven fabrics of woo or of animal hair|
|3.||5208to5212||Woven fabrics of cotton|
|4.||5309to5311||Woven fabrics of other vegetable textile fibres, paper yarn|
|5.||5407,5408||Woven fabrics of manmade textile materials|
|6.||5512to5516||Woven fabrics of manmade staple fibres|
|6A||5608||Knotted netting of twine, cordage or rope; made up fishing Nets and other made upnets, of textile materials|
|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]|
Due to inverted structure of tax, textile industry faced huge blockage of working capital by way of non-refundable accumulated credit.
The Government after recognizing the difficulty being faced by the textile industry has now addressed the issue by issuing Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 which enabled the refund of accumulated credit for textile industry. The aforesaid notification has inserted a proviso in Notification No. 5/2017- Central Tax (Rate) dated 28.06.2017, which reads as under:
“(i) nothing contained in this notification shall apply to the input tax credit accumulated on supplies received on or after the 1st day of August 2018, in respect of goods mentioned at serial numbers 1, 2, 3, 4, 5, 6, 6A, 6B, 6C and 7 of the Table below; and
(ii) in respect of said goods, the accumulated input tax credit lying unutilised in balance, after payment of tax for and upto the month of July 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse.”
On perusal of clause (i) above, it is obvious that such refund will apply only to input tax credit accumulated on inwards supplies received on or after 01.08.2018 which is utilized towards outward supplies of textile products mentioned in Sr. No. 1 to 7 and same is in line with the industry demand, however, confusion has arose due to clause (ii), which says accumulated input tax credit lying unutilized in balance, after payment of tax for and up to the month of July 2018, on the inward supplies received up to 31.07.2018 shall lapse. The plain reading of above clause says that after payment of tax (Output) for July 2018, any balance of Input tax credit would lapse.
Therefore, it connotes that any stock which is lying as on 31.07.2018 and which will be sold from August-2018 onwards will have to be supplied either on cash payment of GST or by utilizing input tax credit earned with respect to inwards supplies from August – 2018 onwards. In other words, any balance lying in input tax credit ledger will extinguish after utilizing the same to the extent of liability towards July, 2018 outwards supplies.
1. The intent of the Government is to allow the refund on fabric w.e.,f 01.08.2018 and same can be perceived from the statement of Hob’ble finance minister. The Finance Minister briefed the media on the decisions taken by the council in its 28th Meeting, in which he categorically said that credits taken prior to 27.07.2018 would be blocked and credits taken thereafter would only be eligible for refund, the Hon’ble finance minister has no where said that the credits would lapse and no more available.
2. The Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 as well as Notification No. 5/2017- Central Tax (Rate) dated 28.06.2017 are issued in terms of powers given under section54(3)(ii) of the CGST Act, 2017. The above section empowers the government only to issue notification with respect to supply of those goods or services which shall not be eligible to claim refund of accumulated credit It does not empower the government to extinguish or lapse the credits earned which is a vested right acquired by virtue of Section 16 of CGST Act, 2017.
The ITC may lapse for the purpose of claiming refund but it should be available for making payment for outward supply. The notifications should have restricted itself to the power given under Section 54(3)(ii). ). We hope that government shall immediately clarify the ambiguity regarding lapse of unutilized ITC lying in Credit ledger as on 31.07.2018. Alternatively, the vires of para 2 of N.N.20 Central Tax Rate dated 26.07.2018 may be challenged before Hon’ble High Court under Writ jurisdiction and it appears to be ultra vires vis-à-vis fundamental rights and liable to be struck down and set aside.
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