High Court allows refund on input services under “inverted tax” category, holds restriction in CGST Rules as ultra-vires
In an important judgment in the case of VKC Footsteps India Private Limited v. UOI, 2020-VIL-340-GUJ, the Gujarat High Court held Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) to be ultra vires of Section 54(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). Consequently, the High Court allowed refund on input services under “inverted tax” category.
- Section 54(3) of the CGST Act allows refund of Input Tax Credit (‘ITC’) to a taxpayer operating under “inverted tax” structure i.e. where rate of tax on inputs is higher than rate of tax on output.
- Section 2(63) of the CGST Act defines ITC as credit of Input Tax. Similarly, Section 2(62) defines ‘Input Tax’ to mean tax charged on supply of goods or services or both. Hence, Section 54 of the CGST Act does not bar refund on input services.
- Rule 89(5) of the CGST Rules prescribes formulae basis which refund on account of inverted tax structure is computed. Rule 89(5) (as amended and applicable from July 1, 2017) excludes input services from computation of refund amount.
- Taxpayers challenged Rule 89(5) of the CGST Rules as ultra vires of Section 54(3) of the CGST Act for prescribing a restriction which does not derive its powers from the parent statute.
The High Court upheld the taxpayers’ contentions and held Rule 89(5) of the CGST Rules to be ultra-vires of Section 54(3) of the CGST Act.
The ruling is important and brings welcome relief to industries operating in inverted tax structure like tractors, e-vehicles, footwear, edible oils etc. On merits as well, the ruling is correct in so far as intelligible differentia sought to be created between input, input services and capital goods is unreasonable.
Notably, while the Court pronounced its ruling only for input services, the rationale will equally apply to capital goods. The Court duly discussed availability of refund on capital goods in the judgment but the same was not a subject matter of challenge.
Going forward, taxpayers can rely on this judgment and claim refund on input services and capital goods. Taxpayers can also consider applying for such refund for past period even though they may have claimed refund only on inputs. While the common portal may not permit multiple refund claims for same tax period, there is no such legal bar in filing multiple refund applications for a tax period. If taxpayers face difficulty in filing refund claims on portal, they can file manual refund claims.