Under any law, the scope for litigation on certain provisions always exists. Some of the provisions requiring less clarity or arguments get settled at the lower court, however, certain provisions are unconstitutional or violative to the rights of the taxpayers which attracts the attention of the High Courts or in some cases, the Apex court of India i.e., The Supreme Court.

Under GST Law as well, several provisions have been challenged by the taxpayers in the High courts and Supreme Court. In the recent past, one of the most debatable provisions which got challenged in court was related to refund in case of inverted duty structure. Taxpayers across the country found such provision of refund as violative of their rights and unconstitutional against which the taxpayers filed petitions in the High courts of their respective states. (Read More: Internal Audit Consulting: A Promising Tool For Companies’ Growth)

Let us take an example to understand the difficulties faced by a taxpayer in the case of an inverted duty structure. Mr. A engaged in the business of trading of goods taxable at the rate of 5% is receiving inward supplies of goods & services (both taxable at the rate of 18%). Now, since the law allows refund of ITC accumulated only on inputs, ITC accumulated on input services gets blocked and ultimately adds to the cost of the taxpayer. Due to such difficulties, the taxpayer challenged the provision in High Courts.

Law Interpretation: –

Recently Madras High Court & Gujrat High Court had passed their judgment on inverted duty structure. The Gujarat High Court in the case of VKC Footsteps India Pvt Ltd. V/s Union of India [R/ Special Civil Application No 2792 of 2019], passed a judgment in favour of taxpayers which provided a relief to the taxpayers for the due time wherein the honorable Judge stated that Rule 89 which prescribes the formula for calculation of refund restricted only to ITC on “inputs” is violative of Article 14 of The Constitution of India as it treats dealers with accumulated credit on input goods and dealers with accumulated credit on input services differently and also it is contrary to the provision of section 54(3)(ii) of CGST Act. Court further pointed out that, the CGST Act, categorically provides for refund of ‘unutilised input tax credit’ without any distinction made between input goods and services. Therefore, the rules cannot disallow a benefit that is granted by the parent legislation.

Gujrat High Court Judgement Interpretation: –

Now if we apply the outcome of the Gujrat High court judgment on our example, Mr. A can use the judgment to apply for the refund of ITC for both Input and Input services.

However, on the contrary, the Madras high court had a divergent view in this regard. Madras high court in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India [Writ Petition Nos 8596, 8597, 8602, 8603, 8605, and 8608 of 2019] passed a judgment in favour of the department. Honourable Judges in such case stated that section 54(3)(ii) of CGST Act 2017 governing the refund provision in case of inverted duty structure is not violative of the rights of taxpayers and does not infringe Article 14 of The Constitution of India. Further, it was concluded by the court that Rule 89(5) of the CGST Rules, as amended, conforms with section 54(3)(ii).

This content is meant for information only and should not be considered as an advice or opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by

CA Tarun Kapoor

AKGVG & Associates