Refund of ITC on account of tax paid on input services in case of inverted duty structure (Happy GST series – 25) by CA Rajender Arora
Honourable Gujarat High Court on 24/07/2020 in case of writ petition filed by VKC Footsteps
India Pvt. Ltd. V Union of India & 2 others, directed to allow the claim of the refund considering
the unutilized input tax credit of “input services” as a part of 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 u/s 54(3) of CGST Act, 2017
1. What is “input”, “input services”, “input tax”, and “input tax credit” as defined under
Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”, “Act”)?
Input: As per 2(59) of the act, it means any goods other than capital goods used or intended
to be used by a supplier in the course or furtherance of business.
Input Services: As per 2(60) of the act, it means any service used or intended to be used by
a supplier in the course or furtherance of business.
Input tax: As per 2(62) of the act, 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 the integrated goods and services tax charged on import of
goods, the tax payable under Reverse Charge Mechanism (“RCM”) but does not include the
tax paid under the composition levy.
Input tax credit: As per 2(63), ITC means the credit of input tax.
2. What does section 54(3) says?
Sec 54(3) of CGST Act, 2017 states that a registered person shall only be able to claim refund
of unutilised input tax credit only in the following two cases:
In case of zero rated supplies made without payment of tax, i.e. under LUT
In case of inverted duty structure i.e. where the credit has accumulated on account of rate of
tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully
exempt supplies), except supplies of goods or services or both as may be notified by the
Government on the recommendations of the Council.
3. How refund of input tax credit is granted in case inverted duty structure?
Rule 89(5) of CGST Rules, 2017 provides with a formula for calculating the refund of ITC which
is:
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 and
services.
Whereas as per explanation given or the purposes of this sub-rule, the expressions
*Net ITC shall mean input tax credit availed on inputs during the relevant period other than the
input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and
**Adjusted Total turnover and relevant period shall have the same meaning as assigned to them
in sub-rule (4).
4. Have rule 89(5) undergone amendments since its inception?
Yes, rule 89(5) when introduced, allowed refund on account of tax paid on input and input
services both in case of inverted duty structure but by virtue of N/N 21/2018-CT dt 18.04.2018,
the Central Government amended rule 89(5) and allowed ITC on account of inputs only and this
notification was made effective retrospectively from 01.07.2017 vide N/N 26/2018-CT dt
13.06.2018.
5. Why the writ petition was filed?
The writ petition was filed on the following grounds:
The petitioner held that the amended rule 89 of the CGST Rules is violative of Article 14 of
the Constitution of India in as much as it treats dealers with accumulated credit of inputs and
dealers with accumulated credit of input services differently.
Held that the amendment of rule 89 cannot be given retrospective application.
Held that the amended rule 89 of the CGST Rules is ultravires section 54(5) in as much as
section 54(3) provides for refund of any unutilsed ITC accumulated on account of inverted
duty structure thereby covering credit of both inputs and input services.
Even held that sec 164(3) is unconstitutional in as much as it suffers from the vice of
excessive delegation.
6. What was finally decided by the Honourable Gujarat High Court?
Honourable Gujarat High court held that explanation (a) to rule 89(5) which denies the refund of
“unutilized input tax” paid on “input services” as a part of “input tax credit” accumulated on
account of inverted duty structure is ultra vires to the provision of sec 54(3) and directed to allow
the claim of the refund considering the unutilized input tax credit of “input services” as a part of
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 u/s 54(3) of CGST Act, 2017.
Our view point -We welcome this judgment as the fundamental feature of the GST is that
effective taxation of the goods takes place at the stage of supply to the final consumer only and
all the taxes paid at the initial stages should be fully absorbed in the tax on outward supply.
Where is it not so, refund of accumulated unutilized accumulated credit can only achieve the
objective of removal of cascading of taxes. Also, government just cant deny the credit of input
tax by amending or framing the rules in this regards as claiming ITC is the vested right of
taxpayer if not a constitutional right.
