The Gujarat High Court has allowed refund of accumulated credit of input services in case of inverted duty structure. It held that Explanation (a) to Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”), 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, is ultra vires the provisions of Section 54(3) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Consequently, Explanation (a) to Rule 89(5) of CGST Rules was read down to the extent it denied refund of ITC as accumulated on account of ”input services”.
This decision dated July 24, 2020 comes as a relief to all assesses suffering from accumulation of excess ITC on account of inverted duty structure caused due to higher rate of tax on “input services”. Going forward, subject to Section 54(3) of CGST Act, assesses may seek refund of entire Input Tax Credit (“ITC”).
The assessee was engaged in manufacture and supply of goods attracting GST @ 5%. Majority of the inputs/input services used by the assessee attracted GST at the rate of 12%/18%, thereby resulting in accumulation of ITC in the hands of the assessee. Rule 89(5) of CGST Rules prescribed a formula for refund of input tax credit in case of inverted duty structure. By way of Notification No. 21/2018-Central Tax, dated April 18, 2018, a revised formula was prescribed under Rule 89(5) of CGST Rules resulting in denial of refund of credit accumulated on account of “input services”. Further, by way of Notification No. 26/2018-Central Tax, dated June 13, 2018, the said formula was made effective from July 1, 2017.
- GST being a consumption tax, tax burden is borne only by the final consumer and not the business. In order to avoid cascading effect of taxes in the form of unabsorbed excess tax on inputs with consequent increase in cost of product, a mature GST law provides for refund of accumulated unutilised excess input tax credit.
- Rule 89(5) of CGST Rules, under the garb of fixing formula for determining pro-rata amount of credit relatable to inverted duty structure turnover vis-à-vis total turnover, has instead, erroneously restricted the refund of ITC to inputs alone.
- There is nothing either in Section 54(3) of CGST Act or under proviso (ii) to said section to restrict refund to ITC on inputs.
- Restrictive formula prescribed in Rule 89(5) of CGST Rules, in effect, whittles down the effect of the word “any” employed in Section 54(3) of CGST Act. Such an exercise cannot be considered as a rule “for carrying out the provisions of the Act”, thereby rendering it violative of rule-making power conferred by Section 164(1) of CGST Act.
- Whereas refund of unutilized ITC in respect of tax paid on input services is permitted in case of zero-rated supplies, there is no intelligible differentia supporting rejection of refund of such ITC accumulated on account of inverted duty structure alone. On this count, the amended rule is discriminatory.
- Rule 89(5) of CGST Rules only provides the mode of calculation of refund available, and to that extent, there is no embargo placed by Section 54(3) of CGST Act.
- Rule-making power conferred by Section 164 of CGST Act is worded in the widest possible manner. Therefore, amendment made to Rule 89(5) of CGST Rules is intra vires the provisions of the CGST Act.
Judgement of the Gujarat High Court
- Sub-section (3) of Section 54 of CGST Act, 2017 provides for claim of refund of “any unutilised input tax credit”. The phrase “input tax credit” is defined in Section 2(63) of CGST Act to mean the credit of input tax. The phrase “input tax” as defined in Section 2(62) of CGST Act means the tax charged on any supply of goods or services or both made to any registered person.
- The term “input” is defined in Section 2(59) of CGST Act to mean any goods other than capital goods, and “input service” as per Section 2(60) of CGST Act means any service used or intended to be used by a supplier. Thus “input” and “input service” are both part of the “input tax” and “input tax credit”.
- Therefore, as per provisions of Section 54(3) of CGST Act, the legislature has provided that registered person may claim refund of “any unutilised input tax credit”. By way of Rule 89(5) of CGST Rules, such claim of the refund cannot be restricted only to “input”, excluding the “input services” from the purview of “input tax credit”.
- Moreover, clause (ii) of proviso to sub-section (3) of Section 54 of CGST Act also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST Rules.
- Intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in Circular No. 79/53/2018-GST, dated December 31, 2018.
It may be noted that though the said decision in the case of VKC Footsteps India Pvt. Ltd. v. Union of India and others is not an authority on refund of ITC accumulated on account of “capital goods”, based on this ratio, one may approach the judiciary to appropriately challenge non-inclusion of ITC on capital goods for refund.