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Gujarat High Court Allows Refund of “Accumulated Input Tax Credit on Input Services” in Case of “Inverted Duty Structure”

August 20, 2020

Gujarat High Court Allows Refund of "Accumulated Input Tax Credit on Input Services" in Case of "Inverted Duty Structure"

In one of the landmark judgment, the Gujarat High Court in the case of VKC Footsteps India Pvt. Ltd. Vs. Union of India held that the Explanation (a) to Rule 89(5) of the CGST Rules, 2017 is ultra vires the provisions of Section 54(3) of the CGST Act, 2017, which denies the refund of 'unutilized input tax' paid on 'input services' as part of 'input tax credit (ITC)' accumulated on account of inverted duty structure.

Facts of the Case:

The Petitioner, VKC Footwear India Pvt. Ltd., who is into the business of manufacture and supply of footwear & footwear attracts GST at the rate of 5%. The Petitioner procures input services such as job work service, goods transport agency service, etc. and inputs such as synthetic leather, PU Polyol, etc., on payment of applicable GST at the rate of 12% or 18% in the majority.

Based on the above-mentioned structure of its operations, the petitioner has an inverted duty structure, i.e. GST paid on inward supplies is more than GST paid on its outward supplies and hence there is an accumulation of unutilized ITC in its electronic credit ledger.

The petitioner contended that the Explanation (a) to Rule 89(5) of the CGST Rules, 2017 restricts the refund of accumulated ITC on account of input services under inverted duty structure and therefore is ultra vires the provisions contained in Section 54(3) of the CGST Act, 2017.

It was highlighted that in terms of the proviso to Section 54(3) of the CGST Act, 2017 'no refund of unutilized ITC shall be allowed in cases other than where 'the tax credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies'.

The term 'input tax credit' is defined under Section 2(63) of the CGST Act, 2017, and provides that input tax credit means the credit of input tax. Similarly 'Input tax' has been defined under Section 2(62) of the CGST Act, 2017, and provides that input tax to a registered person means the CCST, SGST, UTGST, or IGST charged on any supply of goods or services. However, Rule 89(5) of the CGST Rules, 2017 which was amended vide notification No. 26/2018-Central Tax on 13th June 2018, further restricted the GST refund of input tax on input services.

Further Central Board of Indirect Taxes and Customs (CBIC), vide their Circular No. 79/53/2018-GST, dated 31st December 2018, also clarified that refund of ITC is admissible to the extent of 'accumulated ITC on account of rate of tax on inputs being higher than the rate of tax on output supplies' and is not admissible for input service per se.

The petitioner further contended that the basis above mentioned Circular and amended Rule 89(5) of the CGST Rules, 2017, is being interpreted by the GST Authorities that the refund of ITC on 'Input service' on account of inverted duty structure is restricted.

Confronting the above interpretation, certain petitions were filed before Hon'ble Gujarat HC and all such similar petitions have been disposed of by this judgment. The key findings of rulings are as below:-

Key finding of Hon'ble Gujarat HC Ruling:

The Hon'ble Gujarat HC observed that the Explanation (a) to Rule 89(5) is overriding the provisions contained in section 54(3) of the CGST Act, 2017.

The Hon'ble Gujarat HC further noted that the word 'Input Tax Credit' & 'Input Tax' are defined under GST Law which means and includes tax charged on any supply of Goods and Services or both made to the registered person. Therefore, the refund cannot be restricted only to the inputs on goods received as provided in Explanation (a) to Rule 89(5) of CGST Rules, 2017, and should cover Input Services as well.

The Hon'ble Gujarat HC, further observed that the Rule cannot restrict the statutory provision as provided in Section 54(3) of the CGST Act 2017.

The Hon'ble Gujarat HC accordingly held that the explanation (a) to Rule 89(5) of the CGST Rules, 2017 is contrary to the provisions of Section 54(3) of the CGST Act, 2017. In fact, the Net ITC should mean "input tax credit" availed on "inputs" and "input services" as defined under the Act.

Therefore, the refund of unutilized ITC would be limited to accumulation arising pursuant to GST rates on inputs being higher than GST rates on output supplies, would only operate as a criterion, which once met, would entitle refund of unutilized ITC irrespective of its composition

Our Comments:

We are of the view that by the above decision, the Government may bring an amendment to Rule 89 of the CGST Act 2017. Further, we are of the view that now a taxpayer operating in an inverted tax structure environment can get a refund of unutilized ITC on 'Input Services' as well, and therefore, It would be a significant relief for industries functioning under this tax set up.

The companies who are suffering on account of blocked ITC under a similar situation would be desirous to evaluate the ruling in detail and analyze if the benefit of this ruling can be availed in their case which may support in bringing a substantial cash flow benefit to such companies under the prevailing pandemic situation.

One major issue required to be assessed is that, how will companies avail the benefit of this decision, particularly related to the past periods considering the time limit for a filing refund claims under the GST scenario and the fact that assessees are not permitted to file a refund claim for a particular period twice.

Source: VKC Footsteps India Pvt. Ltd. Vs. Union of India & Others [2020-TIOL-1273-HC-AHM-GST]

Last Updated: 20th August 2020 This article is contributed by: 

CA Vaibhav Matta Assistant Director, Taxation


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