Gujarat HC reads down Explanation to GST Rule denying Refund of ‘Unutilized Input Tax’ paid on ‘Input Services’ as part of ITC [Read Judgment]

A two-judge bench of the Gujarat High Court has categorically held that the Explanation (a) to Rule 89(5) of the CGST Rules which denies the refund of “unutilized input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.

The bench further noted that the net Input Tax Credit (ITC) formula used for GST refund under the inverted tax structure can cover input services as well.

The Petitioner, VKC Footwear India Pvt. Ltd. is engaged in the business of manufacture and supply of footwear which attracts GSTat the rate of 5%. The Petitioner procures input services such as job work service, goods transport agency service, etc. and inputs such as synthetic leather, PU Polyol, etc., on payment of applicable GST for use in the course of business and avails input tax credit of the GST paid thereon. The majority of the inputs and input services attract GST at the rate of 12% or 18%.

The GST rate paid by the Petitioner on procurement of input is higher than the rate of tax payable on their outward supply of footwear. Therefore, in spite of the utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized credit in the electronic credit ledger of the Petitioners.

The judgment was passed on VKC Footwear where other matters were also clubbed. The restrictions provided in Rule 89(5) are beyond the extent of Section 54, which does not limit the refund of only inputs. Section 54(3) covers the refund of the credit of tax on both goods and services.

It means that now a taxpayer operating in an inverted tax structure environment can get a higher refund of unutilized ITC. It would be a significant relief for industries functioning under this tax set up. These include textiles, railway locomotives & parts, handlooms, solar modules, e-commerce, steel utensils, mobiles, etc.

Section 54(3) of the CGST Act allows refund of any unutilized input tax credit at the end of any tax period due to an inverted tax structure. Here, there is no specific mention of goods (inputs) or services (input services) alone. Hence, it can be concluded that the provision covers both services and goods.

On the other hand, Rule 89(5) of the CGST Rules defines a formula for calculating the amount of ITC refund due to the inverted tax structure. The maximum refund amount is equal to {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover } – tax payable on such an inverted rated supply of goods and services.

However, the net ITC in this formula is defined as input tax credit availed on inputs during the relevant tax period. It does not see a mention of input services. But on observing the rest of the components of the above formula, turnover and output tax refer to services as well.

Even though the rule does not technically cover input services in the formula, the provision of the act overrides the rule to cover services. Hence, the High Court maintained that input services should also be eligible for ITC refund due to the inverted tax structure, the bench observed.

“In view of the above, Explanation (a) to Rule 89(5) is read down to the extent that Explanation (a) which defines “Net Input Tax Credit’ means “input tax credit” only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section54(3) of the CGST Act. In fact, the Net ITC should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act,” the bench observed.

It was a long pending issue. Many Industries were facing this problem. Specially E-commerce etc. where there is the accumulation due to the inverted rate and a bigger part is services.

The division bench of Justice J.B. Pardiwala and Justice Bharghav D. Karia pronounced the order in the Group of 10 Matters that net ITC in the formula given under Rule 89(5) of CGST Rules 2017 will include the value of input services also. In effect, the assessees will be eligible to claim a refund of input services in case of an inverted duty structure.