The Tale of Two Contrasting Decisions

Refund of ITC on Input Services

Within GST, the term “Inverted Tax Structure” represents the situation when the GST rate paid on inward supplies (or purchases) is higher than the GST rate paid on outward supplies (or sales).

According to section 54 of CGST, claiming a refund of any tax and interest paid may require an application before the expiry of two years from the relevant date, file an application in the prescribed form and manner. Refund claim may arise on account of: –

Refund of any unutilized input tax credit at the end of any tax period in case of: –

(i) zero-rated supplies made without payment of tax

(ii) where the credit has increased due to an inverted duty structure.

2. Refund of taxes on purchase made by UN or embassies etc

3. …

4. …

5. …

6. …

Further Rule 89(5) of CGST Rules, 2017 has specified the manner of computation of Refund Amount in case of Inverted Duty Structure which states: –

*Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods

*This formula was substituted vide Notification No. 21/2018-CT dated 18.4.2018 inter alia excluded input services from the opportunity of ‘net input tax credit’ for calculation of the refund amount under the rule.

Here, Net ITC shall mean input tax credit availed on inputs during the relevant period.

In India, some industries such as textiles, solar modules, fertilizers, steel utensils, railway wagons, textiles, etc have their business model structured in such that they must pay more tax on a purchase than sales i.e., inverted duty structure is followed.

As a result of which they have GST Input Tax Credit (ITC) in their electronic credit ledger even after paying off the output tax liability, thus leading to non-utilization of ITC which pertains to input services. So, this unutilized ITC of service acts as a pain area for these industries as they are not able to claim the refund for the same and thus creating working capital issues for them. Consequently, it adds to their cost, and the ultimate burden is borne by the customers in the form of high prices, thus defeating the fundamental objective of GST, which is diminishing the burden of the tax on the final consumer.

In an application filed before AAR under GST, Gujarat by VKC Footsteps India Pvt Ltd dated 24.07.2020, it was a welcome judgment in favour of suppliers facing this dilemma.

Discussion & Findings

In accordance with the facts of the case, the Petitioner is occupied in the business of manufacture and supply of footwear and this is what attracts GST at the rate of 5%.  

The majority of the inputs and input services attract GST at the rate of 12% or 18%. Thus, there is an accumulation of unutilized credit in the electronic credit ledger of the Petitioners.

Held that

Section 54 specifies the word input tax credit which is defined u/s 2(63) as “credit of input tax”, whereas Input tax as per section 2(62) means the tax paid on both goods and services. Input service defined in section 2(60) means any service used or intended to be used by a supplier. In a nutshell, “input” and “input service” are both part of the “input tax” and “input tax credit”.

They further stated that Explanation (a) to Rule 89(5) which denies the refund of “unutilized input tax” paid on input services to form part of “input tax credit”, which is accumulated on account of inverted duty structure, is ultra vires the provision of Section 54(3) of the CGST Act,2017 and such claim of the refund cannot be restricted only to “input” except the “input services” from the extent of “Input Tax Credit”.

Decision with distinctiveness

On the contrary, Hon’ble Madras High Court has a different stance by holding that Rule 89(5) is intra vires the Central Goods and Services Tax Act, 2017. According to them, the condition to claim a refund of the entire unutilized ITC as per sec 54(3) would defeat the purpose of words ‘accumulated on account of’ in clause (ii) of the proviso to Section 54 (3).

Writers Enlightenment

This issue is still an open house for debate and discussion with different standpoints on whether a taxpayer should get the refund of any unutilized credit including input service. There was no discussion on how to compute the amount of unutilized ITC attributable to the inverted duty inputs as it becomes difficult to bifurcate them once it gets credited to the electronic credit ledger.

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

Posted by: CA Tarun Kapoor

AKGVG & Associates

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