Madras High Court Ruling* – Refund of unutilised credit of Input Goods in case of Inverted Duty Structure
Facts |
ü Section 54(3) of the CGST Act 2017 [‘Section 54(3)’] provides for a registered person to claim refund of any unutilised ITC at the end of any tax period, provided that no refund of unutilised ITC shall be allowed in cases other than- § zero rated supplies made without payment of tax [Section 54(3)(i)] § where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on OS (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 [‘Section 54(3)(ii)’] ü Rule 89(5) of CGST Rules 2017 [‘Rule 89(5)’] (amended w.e.f. 13 June 2018) provides formula for the computation of refund of ITC on account of IDS. The formula contains the term ‘Net ITC’ which is defined therein as ITC availed on inputs (and not input services) during the relevant period ü Under section 2 of GST Act, ‘Inputs’ and ‘Input Services’ are defined; definition of ‘Inputs’ cover only goods and not services
ü Section 54(3) enables a registered person to claim a refund of any unutilised ITC i.e., full refund of all unutilised ITC. But, the provisions of Rule 89(5) are not consistent with the same ü The word ‘inputs’ in Section 54(3)(ii) should be construed as per common parlance and would mean both IG and IS so as to uphold constitutional validity of the provision ü Such classification between IG and IS discriminates between persons and is arbitrary and invidious
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Questions for Consideration to High Court |
Various points were outlined for consideration of the court; key among the same being:
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Discussions and Rulings of the High Court |
ü It is a settled proposition of law that in the matter of taxation, the legislature has greater latitude or power to give effect to its policy. Simple example is the policy of taxing some goods and leaving others outside the net of taxation cannot be criticized as violative of Article 14 of the Constitution ü Under the GST laws, goods and services are treated similarly in certain respects but differently in other respects. The distinction between the treatment of goods and services is not completely eliminated in all respects. There are inherent differences between goods and services. Parliament has wide latitude regarding taxes and economic legislations which is recognised and affirmed by the Supreme Court. Such latitude includes the subject matter of classification, nature and character of refund, etc. ü Extension of the benefit of refund only to the unutilised ITC that accumulates on account of the rate of tax on IG and not due to IS, is a valid exercise of legislative power ü There is no necessity to either read down or hold Section 54(3)(ii) and Rule 89(5) as unconstitutional
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* Various writ petitions (including Petition Number 8596 in the case of Transtonnelstroy Afcons Joint venture) were clubbed together and judgement delivered on 21 September 2020 (In the High Court of Madras). It is interesting to note that the Gujarat High court in the case of VKC Footsteps has taken a divergent view and allowed refund of Input services. Hence judicial developments in this regard should be tracked.