GST: Gujarat High Court Allows Refund Of Tax On Input Services Under Inverted Duty Structure

In a relief to businesses, the Gujarat High Court ruled that companies can claim refund using unutilised tax credit arising from input services under the inverted duty structure.

A bench comprising Justice JB Pardiwala and Bhargav Karia observed that disallowing refund of the tax paid on input services is contrary to the Central Goods and Services Tax Act. As such, the court ruled that businesses must be allowed to factor in the tax paid on input services for calculating the claim of refund under the inverted duty structure.

In doing so, the court read down of a part of the CGST rules that excluded input services from the purview of a refund.

Input tax credit is the tax paid on inputs. Businesses get a credit for this to deduct from the tax on output to avoid double taxation. In certain cases, however, the tax rate on inputs can be more than that on outputs, resulting in an inverted duty structure. This leads accumulation of unutilised tax credit in the electronic ledger.

The Section 54 of the CGST Act allows businesses to claim refund of taxes paid on ‘inputs’, without any differentiation between goods or services. The refund can be claimed by filing RFD-01A — an electronic form within a period of two years from the end of the financial year in which the claim arises.

Problems emerged when the government amended the CGST Rules in April 2018 to exclude the tax paid for ‘input services’ from the scope of ‘net input tax credit’ used for computing the refund amount. That prompted a bunch of petitioners, including VKC Footsteps, to challenge the validity of the amendment.

Counsel for the petitioners argued

V Shridharan and Mihir Joshi challenged the government’s move by making the following submissions:

• GST was enacted in India as a consumption tax based on the principles of value addition with an aim to minimise cascading effect and facilitating a ‘seamless’ flow of input tax credit.
• Section 54 of the CGST Act addresses the anomaly of an inverted duty by allowing refund of additional taxes borne by businesses.
• As the law includes the tax on goods as well as services within the definition of ‘input tax’, Rule 89 cannot make a contrary differentiation as it is subordinate to the act.
• The amendment results in a ‘perpetual retention’ or appropriation of tax credit by the government which is contrary to the legislative intent.

Counsel for the GST department argued that:

• The amendment in the CGST rules only provides a ‘mode’ of calculating refund under the inverted duty structure.
• The GST Act provides wide powers to the government for framing rules for any or all purposes. Therefore, the amendment cannot be held to be contrary or ultra vires the act.

Delving into the GST committee reports, discussion papers, international precedents and the CGST Act, the court provided a partial relief to the petitioners. It said:

• The amended rules violate the act, which entitles a registered person to claim refund of ‘any’ unutilised credit.
• Meaning of ‘supply’ in the act includes all form of goods and services. Therefore, the part of Rule 89, which excludes tax credit on input services, must be read down.
• Tax department must allow claim of refund considering input services as part of the “net input tax credit” for computing tax refunds.

Tax Credits – A Never Ending Tussle

The government’s move to limit or curtail the use of tax credit has been a contentious issue since the inception of GST three years back. A series of rulings by the Delhi and Bombay high courts has varied the government’s limitations on transitional credit.

The courts have stepped in to the rescue of taxpayers and have equated tax credit with ‘property’ while granting relief. The ruling assumes importance against such background.

The partial reading down of Rule 89(5) is ground-breaking as this is the first time that a court has reached a conclusion out of the several petitions filed on similar premises, Jigar Doshi, partner at Tax Technology Managed Services LLP, told BloombergQuint. Still, there are some unanswered questions, he said.

According to Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., the ruling may help exporters in claiming refund of GST paid on capital goods used for exports from India.

Abhishek Rastogi, partner at Khaitan & Co., agreed. While the judgment is welcome, the full benefit of the ruling can be reaped by including the benefit for the financial year 2017-18, he said. This can be done by further arguing that such credit or refund is a vested right and hence limitation period of two years under the rules will not apply. It is expected that the matter will soon reach the apex court and will ultimately be decided, he said.

Tax experts highlighted that while the ruling is a shot in the arm for companies grappling with liquidity crunch, the government may introduce a retrospective amendment in Section 54 to address the issue on input credits.