GST: Supreme Court Upholds Validity Of Provision That Curtails Benefit Of Tax Credit
The Supreme Court has upheld the constitutional validity of refund provisions in case of inverted duty structure under the goods and services tax law.
The apex court’s order—pronounced by a bench of Justices DY Chandrachud and BV Nagharathna—is a result of two appeals. One, filed by the government against the Gujarat High Court ruling which had held these provisions to be unconstitutional. And two, by taxpayers who were aggrieved by the Madras High Court ruling which went in favour of the tax department.
At the heart of this litigation are Section 54 of the Central GST Act and Rule 89 of CGST Rules, 2017. Read together, these provisions allow refund in case of inverted duty structure only to the extent of ‘goods’ procured by the supplier and not ‘services’.
Inverted duty structure arises when businesses pay a higher tax on inputs than on the output, resulting in accumulation of unused tax credits. While the GST law initially allowed refund on input goods and input services, a 2018 amendment in rules excluded services from the scope of refunds.
The Gujarat High Court had said Rule 89 is violative of Article 14 of Constitution of India in as much as it treats dealers with accumulated credit on input goods and dealers with accumulated credit on input services differently.
The CGST Act, it had said, categorically provides for refund of ‘unutilised input tax credit’ without any distinction made between input goods and services. The rules cannot disallow a benefit which is granted by the parent legislation, it had held.
But the Madras High Court had differed in its conclusion. It had held that the benefit of refund can be availed only to the extent of unutilised input credit that accumulates on ‘goods’.
And so both the government and taxpayers approached the apex court to resolve the contrary rulings. On Monday, the apex court upheld the constitutional validity of these provisions.
It said that to construe the term ‘inputs’ so as to include both input goods and input services would do violence to the provisions of Section 54(3)
It would be impermissible for the court to redraw the boundaries or to expand the provision for refund beyond what the legislature has provided. If the legislature has intended that the equivalence between goods and services should be progressively realised, it lies within the realm of policy.Supreme Court
Charanya Lakshmikumaran, partner at law firm Lakshmikumaran & Sridharan, told BloombergQuint that the Supreme Court has noted that the intention eventually is to progress to an equitable tax system where refund of the credit of both input goods and input services should be allowed. But, the legislative policy for now is restricted only to the refund of credit on input goods and not on input services.
She was representing certain companies in the matter.
The Supreme Court also observed that the proviso to Section 54(3) is actually restrictive in nature and not merely an eligibility criteria. The court took note of the various anomalies pointed out to them during the arguments with respect to the methodology for calculation of refund provided under Rule 89(5) and have made certain recommendations to the GST Council to set right these anomalies.Charanya Lakshmikumaran, Partner, Lakshmikumaran and Sridharan
Experts had earlier told BloombergQuint that if Rule 89 is upheld by the apex court, it will impact cashflow, permeate structural inefficiency and diminish comparative advantage for different sectors of the economy like pharma, fertilisers, steel utensils, railway wagons, textiles, etc.