SC verdict may settle issue of refund

By: CA Sunil Kumar Gupta

Input tax credit in inverted tax structure: SC verdict may settle issue of refund

All eyes are on the Supreme Court as it is expected to pronounce judgment on Monday in the case of 14 petitions related to allowing Input Tax Credit (ITC) on input service in inverted tax structure under the Goods & Services Tax while computing refund. This ruling is critical for the industry, especially e-commerce companies, which are facing problems of blocked credit.

Also, this ruling will end the uncertainty on the issue as two high courts Gujarat and Madras have given contradictory rulings on the subject.

Inverted duty structure means higher taxes on input and lower tax on output or final product. Several products such as footwear have an inverted duty structure. Though Section 54(3) of CGST Act prescribes refund and rule 89(5) of CGST Rules provides a formula for that, an amendment revised the formula with effect from July 1, 2017. The revised formula has excluded input services from the scope of ‘net input tax credit’ for computation of refund. Thus, the substituted rule (Rule 89(5) of the CGST Rules) denied refund on the input tax credit availed on input services and allowed refunds of ITC on inputs alone.

What the Gujarat HC said

The Gujarat High Court, in the matter of VKC Footsteps vs Union of India had upheld an assessee’s right to claim refund of input services under inverted duty structure under the GST. It opined that the explanation of the rule, 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 provision of Section 54(3) of the CGST Act, 2017.

It pointed out that said explanation in the rule is contrary to the provisions of section of the Act.

In fact, the net ITC should mean ‘input tax credit’ availed on ‘inputs’ and ‘input services’ as defined under the Act.

What the Madras HC said

However, the Madras High Court, in the matter of Tvl. Transtonnelstroy Afcons Joint venture vs Union of India had ruled differently. It said:

Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.

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