Gujarat High Court- Input Tax Credit Refund of Input Services is Eligible under Inverted Duty Structure
by ReinHeads Team | Aug 6, 2020
Gujarat High Court*- Input Tax Credit (‘ITC’) Refund of Input Services is Eligible under Inverted Duty Structure
| Facts |
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- VKC Footsteps India Private Limited (‘the Petitioner’) is engaged in manufacture and supply of footwear attracting GST @ 5%
- The Petitioner procures input services (like job work service, goods transport agency service etc.) and inputs (like synthetic leather, PU Polyol, etc.) and avails ITC in respect of GST charged by the vendors
- GST paid on procurement of inputs and input services is higher than the rate of tax payable on outward supply of footwear and accordingly there is unutilized ITC in electronic credit ledger, which is eligible to be claimed as refund under Section 54(3) of Central Goods and Service Tax Act. 2017 (‘the CGST Act’) read with Rule 89(5) of Central Goods and Service Tax Rules, 2017 (‘the CGST Rules’)
- Vide the Notification No. 21 /2018 – Central Tax dated 18 April 2018 r/w Notification No. 26/2018 – Central Tax dated 13 June 2018 revised the formula for determining the refund on account of inverted duty structure [under Rule 89(5) of the CGST Rules] retrospectively from 01 July 2017. Further, Explanation (a) to the Rule 89(5) of the CGST Rules excluded ‘input services’ from the scope of ‘net ITC’ for computation of the refund amount
- Accordingly, the revision in formula [under Rule 89(5) of the CGST Rules] denied ITC refund in respect of input services and allowed refund only in respect of inputs
- Aggrieved by the same, the Petitioner has challenged the validity of Rule 89(5) of the CGST Rules to the extent it denies refund of ITC relatable to input services
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| Issue before the Gujarat High Court (‘HC’) |
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- Whether the Rule 89 of the CGST Rules is ultra vires the provisions of Section 54(3) of the CGST Act inasmuch as the Section 54(3) of the CGST Act provides for refund of ‘any unutilized ITC’ accumulated on account of inverted duty structure thereby covering credit of both ‘inputs’ and ‘input services’?
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| Discussion and Findings of the HC |
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The HC held that the Explanation (a) to Rule 89(5) of the CGST Rules, which denies the refund of ‘unutilised ITC’ paid on ‘input services’ as part of ITC accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act on account of following reasons:
- The word ‘Input Tax Credit’ as defined in the CGST Act means the credit of input tax and ‘input tax’ means the tax charged on any supply of goods or services or both made to any registered person. Thus, both ‘input’ and ‘input service’ are part of the ‘input tax’ and ‘ITC’
- As per provision of Section 54(3) of the CGST Act, the registered person may claim refund of ‘any unutilised ITC’ Therefore, under Rule 89(5) of the CGST Rules, such claim of the refund cannot be restricted only to ‘input’ and exclude ‘input services’ from the purview of ‘Input Tax Credit’
- Clause (ii) of proviso to Section 54(3) of the 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
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| *VKC Footwear India Private Limited v Union of India and 2 others (Gujarat High Court C/SCA/2792/2019 dated 24.07.2020) |
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