CASE SYNOPSIS
FACTS OF THE CASE
Brief background
VKC Footsteps India Pvt. Ltd(hereinafter ‘VKC’) is engaged in the business of manufacture and supply of footwear which attracts GST at the rate of 5%. VKC procures inputs and input services for use in the course of business and avails ITC of the GST paid thereon. Majority of the inputs and input services attract GST at the rate of 12% or 18%. Thus, GST rate paid by the VKC on procurement of input is higher than the rate of tax payable on their outward supply. This results in an accumulation of unutilized credit in their electronic credit ledger.
The Legislative background
Sub-section 3 of Section 54 of the CGST Act, 2017 provides for refund of unutilized input tax credit where the credit is accumulated on the account of inverted duty structure. Section 54(3) (ii) of the CGST Act lays down the eligibility criteria for the grant of refund on account of inverted duty structure.
Rule 89(5) of the CGST Rules, 2017 provide formula for determining the refund on account of inverted duty structure and an assessee is entitled to refund ITC proportionate to the turnover of inverted rated supply of goods vis-à-vis total turnover for that period. Circular No. 79/53/2018-GST dated 31.12.2018 provide examples at Para 4(b) which states that:
The provision of Rule 89(5) as originally introduced was substituted vide Notification No. 21/2018-CT dated 18.4.2018 which prescribed a revised formula for determining the refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide Notification No. 26/2018-CT dated 13.6.2018. The revised formula excluded input services from the scope of ‘net input tax credit’ for computation of the refund amount under the Rule. Thus, the substituted Rule denied refund on the ITC availed on input services and allow refund of ITC availed on inputs alone.
The issue in its crispness
VKC Footsteps in the case before the Gujarat High Court, questioned the validity of amended Rule 89(5) denying refund of ITC on input services, while only allowing ITC on inputs as a part of Inverted duty refund.
CASE SYNOPSIS
CASE DISCUSSIONS
The eligibility of ITC on input services or their utilisation against output liability is not being disputed. The Revenue has disputed the cash refund of such unutilised credit as a part of inverted duty refund.
The Hon’ble Gujarat High Court in this case held that the revised formula prescribed in Sub-rule 5 of Rule 89 of the CGST Rules, 2017 to exclude refund of tax paid on ‘input service’ as part of the refund of unutilized input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act’2017, which provides for claim of refund of ‘any unutilised input tax credit’. The word “Input tax credit” is defined in Section 2(63) means the credit of input tax. The word “input tax” is defined in Section 2(62), which means:
“‘input tax’ in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;”
Whereas, the word “input” is defined in Section 2(59) means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business and “input service” as per Section 2(60) means any service used or intended to be used by a supplier in the course or furtherance of business.
The term “input tax” as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus “input” and “input service” are both part of the “input tax” and “input tax credit”. Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act’2017, the legislature has provided that registered person may claim refund of “any unutilised input tax”, therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit”. Moreover, clause (i) of proviso to Sub-section 3 of Section 54 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, 2017.
In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018- GST dated 31.12.2018 to deny the registered person refund of tax paid on “input services” as part of refund of unutilised input tax credit.
In view of the above, Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines “Net Input Tax Credit’ means “input tax credit” only. The said
CASE SYNOPSIS
explanation (a) of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act.
The Court held that Explanation (a) to Rule 89(5) 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 also directed the Government to allow the claim of the refund made by the petitioners considering the unutilized input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.
Novello Comments;
An amazing and much warranted judgement that brings in the relief to the suppliers of Goods who have a lower output rate and a higher input rate pertaining to taxes. While the law provided for a substatntive entitlement of input services to be let in as part of the refund of inverted duty structure, any attempt to subvert the wisdom of lawmakers needs to be culled out which has been done succinctly by the Hon’ble High Court.
The Hope
The next step is to hope that the wisdom will prevail in the power corridors to accept the judgment and hopefully we don’t see a Revenue SLP before the Hon’ble Supreme Court.
The way forward.
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