High Court denies refund on input services under ‘inverted tax’ category
We apprised you regarding judgment of Gujarat High Court in the case of VKC Footsteps India Private Limited v. UOI, 2020-VIL-340-GUJ allowing refund on input services under ‘inverted tax’ category. In a recent judgment of Madras High Court in the case of TVL Transtonnelstroy Afcons Joint Venture v. UOI, 2020-VIL-459-MAD, the Court overruled the earlier judgment and upheld constitutional validity of Section 54(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). The Court also held that Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) is in conformity with the parent statute. Consequently, the Court disallowed refund on input services under ‘inverted tax’ category.
We are happy to share our Managing Partner, Puneet Bansal’s short video NITYA Dissects I Refund on input services in Inverted Tax Structure – Analysis of recent Madras High Court decision on this issue, available at https://youtu.be/Xar2eTMrNco. In this video, Puneet has lucidly explained underlying legal provisions, judicial pronouncements, NITYA’s take and way forward for taxpayers.
Brief update on judgment is also provided in subsequent paragraphs for ready reference.
- Section 54(3) of the CGST Act allows refund of Input Tax Credit (‘ITC’) where ITC is accumulated on account of ‘inverted tax’ structure i.e. where rate of tax on inputs exceeds 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) excludes input services from computation of refund amount.
- Taxpayers challenged constitutional validity of Section 54(3) of the CGST Act for being violative of Article 14 of the Constitution of India, 1950 (‘Constitution’). Further, the taxpayers challenged that Rule 89(5) of the CGST Rules is ultra vires of Section 54(3) of the CGST Act for prescribing restriction which does not derive its powers from parent statute.
The High Court rejected taxpayers’ contentions and held as under:
- Resort shall be first given to statutory definition of term ‘input’ used in Section 54(3) of the CGST Act which clearly excludes input services and capital goods.
- The distinction created between goods and services under Section 54(3) of the CGST Act is valid and non-arbitrary as goods and services have been treated differently since time immemorial.
- Right of refund is statutory in nature and can only be availed strictly in accordance with the conditions prescribed under law.
- Rule 89(5) of the CGST Rules as amended is in conformity with Section 54(3) of the CGST Act. Thus, Rule is intra vires parent statute.
The judgment distinguishes earlier judgment of the Gujarat High Court in the case of VKC Footsteps India Private Limited (Supra). The judgment will be a set-back for the taxpayers operating under inverted tax structure who have applied to get refund on input services.
On merits, while the judgment is well reasoned, the reasoning given is incorrect. Section 54(3) allows refund of any unutilized ITC and proviso only prescribes situations wherein refund is available. The proviso does not stipulate categories of procurements eligible for refund i.e. whether refund will be allowed only on inputs and not input services or capital goods. In the light of contradictory High Court rulings, the Supreme Court will eventually decide this issue in times to come.
The affected taxpayers may continue to file refund on input services and capital goods to keep issue alive.
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