One of the main focus for bringing in the GST regime was to nullify the cascading effect of taxes that prevailed due to various Indirect Tax laws. GST was meant to be borne by the final consumer and a free flow of Input Tax credit was promised to manufacturers, wholesalers & retailers. Any excess credit available was allowed as a refund and Section 54 of the GST act specifically deals with various scenarios of refunds

Section 54(3) of the GST act deals with refund claim related to a registered person conducting zero rated supply or person coming under ‘Inverted Duty Structure’. Which provides that any individual who accumulates excess Input Tax Credit over his output tax liability due to the reason of having higher input rates, he would be eligible to claim refund of such excess amount. Section 54(3) of the CGST Act read with Rule 89(5) of CGST Rules are the go-to Sections for refunds in case of an inverted duty structure. When it was introduced, Rule 89 stated that the refund amount would be on the basis of a proportionate formula of the turnover to the net input tax credit. ‘Net ITC’ was defined as input tax credit availed on inputs and input services during the relevant period. This rule was substituted through Notification No 21/2018 (CT dated April 18, 2018), the substitution removed the word input services. Which prompted that tax payers could avail refund on Input of goods only and not Input Services. Even as taxpayers were digesting this artificial restriction, Notification No 26/2018 was issued, denying credit on input services with retrospective effect from July 1, 2017.

Facts of the Case:

VKC Footsteps India PVT LTD is engaged in the business of manufacture and supply of footwear which attracts GST at the rate of 5%. They procure 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. Majority of the inputs and input services attract GST at the rate of 12% or 18%. Thus, GST rate paid by them on procurement of input is higher than the rate of tax payable on their outward supply of footwear. Therefore, in spite of utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized credit in their electronic credit ledger. allowing refund of accumulated input tax credit of tax paid on inputs such as synthetic leather, PU Polyol, etc. However, refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied.

Submissions on behalf of VKC Footsteps India PVT LTD:

  1. Failure to remove cascading effects of taxes by not providing the refund of excess ITC as it would be a cost to manufacturers, wholesalers and retailers.
  2. Failing to uphold the tenants of the GST act of providing free flow of ITC and the GST being borne by the consumer.
  3. Discrimination in providing Input incurred on goods and not on ‘Input Services’.
  4. ITC refund is easily granted to assesses ‘Zero rated supply’ but no refund on the ‘Input services provided.
  5. A rule cannot override the statutory act and hence in the above case Rule 89(5) is ultra vires to Section 54(3).

Submission on behalf of the department:

  1. Section 164 of the GST act confers the power on the government to make rules to the widest possible manner to carry out provisions of the act.

Observations by Supreme Court:

  1. Rules which are subordinate to main Act cannot prescribe a new levy or restrict any existing right. Hence rule 89(5) cannot take away the power vested in tax payer by Section54(3) to claim Input Tax Credit.
  2. The Government does have the power to create rules which can act as guidance and procedures but it can never supersede any section of the act.
  3. There is no difference between ‘Input’ and ‘Input services’ in the terms of availing credit and that there has been a misinterpretation of the words ’Net Input Tax Credit’

Judgement:

The department is, therefore, directed to allow the claim of the refund made by the VKC Footsteps India PVT LTD considering the unutilized input tax credit of “input services” as part of the “net input tax credit” for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.