Supreme Court: Inverted duty refund not admissible for input services

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September 14, 2021 2:00 AM

The top court also set aside the Gujarat HC judgement which declared that Rule 89(5) of CGST Rules as ultra vires Section 54(3), for restricting the refund only to input goods.

The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods.The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods.

Referring to the anomalies pointed out by assessees in computation of input tax credit in value chains involving inverted tax structures, the Supreme Court on Monday urged the Goods and Service Tax (GST) Council to reconsider the relevant formula and take a policy decision on the matter.

However, the SC upheld the Madras HC judgement in favour of Central GST (CGST) rules that inverted duty refund is admissible only with respect to inputs for goods and not for input services. The top court also set aside the Gujarat HC judgement which declared that Rule 89(5) of CGST Rules as ultra vires Section 54(3), for restricting the refund only to input goods.

The GST Council, which will meet on September 17, will likely discuss the inverted duty structure. Inverted duty structure arises in products such as footwear and ready made garments due to higher taxes on input and lower rates on final products.

In its decision in the VKC Footsteps India, the Gujarat High Court held that by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act which provides for a claim of refund of any unutilised ITC.

The Madras High Court on the other hand while delivering its judgment in Tvl. Transtonnelstory Afcons Joint Venture declined to follow the view of the Gujarat High Court noting that the proviso to Section 54(3) and, more significantly, its implications do not appear to have been taken into consideration in VKC Footsteps India except for a brief reference.

“Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras HC and disapprove of the view of the Gujarat HC,” the top court said in its order.
The aberrations, which have been pointed out by V Sridharan (appearing for VKC Footsteps) and G Natarajan (for intervenor), certainly indicate that the formula is not perfect, the Supreme Court noted. “Given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same,” it said.

The formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services. While a similar formula is provided in Rule PART G 130 89(4) with regard to zero rated supplies, in that case, the ‘Net ITC’ includes input goods and input services and thus, there is no imbalance between the different components of the formula. The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods.

“This in our view is at odds with reality, where the ITC on both input goods and input services is accumulated in the electronic ledger and is then utilised for the payment of output tax. In making such an assumption, the formula tilts the balance in favour of the Revenue by reducing the refund granted. We are equally cognizant of the fact that the proposed solution, that is prescribing an order of utilisation of the ITC accumulated on input services and input goods, may tilt the balance entirely in favour of the assessee as that would make a contrary assumption that the output tax is discharged by the ITC accumulated on account of input services entirely,” the SC noted.

The SC noted that mere flaws in a formula laid down by a Parliamentary law can’t necessitate negation of a fiscal rule. “The industry players would hope that the government would reconsider the anomalies pointed out by the assessees in this petition and re-craft the formula in a better manner,” said Abhishek Jain, tax partner, EY India.

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