ITC on Capital Goods

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Refund of ITC on Capital Goods

Section 16(3) of IGST Act, 2017 which provides entitles the person making zero-rated supplies to claim a refund of an unutilized input tax credit. The relevant extract
of the provision is as follows

A registered person making zero-rated supply shall be eligible to claim a refund under either of the following options, namely:-

▪ he may supply goods or services or both under bond (a) or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim a refund of the unutilized input tax credit; or

▪ he may supply goods or services or both, subject to such (b) conditions, safeguards, and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied in accordance with the provisions of Section 54 of the Central Goods and Services Tax Act, or the rules made thereunder.”

The above sub-section allows the person making zero-rated supplies to claim a refund of unutilized input tax credit and the term ‘input tax credit’ is defined
under Section 2(63) which means the credit of input tax. The term input has been defined under Section 2(62) as follows: “input tax” in relation to a registered person, means the central tax, State tax, integrated tax, or Union territory tax charged on any supply of goods or services, or both made to him and includes—

1) the integrated goods and services tax charged on import of goods.
2) the tax payable under the provisions of sub-sections (3) and (4) of section 9.
3) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act.
4) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
5) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy”

As per this definition, input tax means the central tax, state tax, integrated tax, or Union territory tax charged on any supply of goods and services, or both made to this. This definition has not differentiated between the input tax credit on inputs, input services, and capital goods which mean it includes an input tax credit on inputs, input services, and capital goods.

It implies that Section 16 of IGST Act, 2017 entitles the person making zero-rated supplies to claim a refund of the input tax credit on inputs, input services and
capital goods.

• However, Section 16 of the IGST Act, 2017 provides that refund shall be claimed in accordance with Section 54 of CGST Act, 2017 or the rules made thereunder.

• Section 54(1) provides that Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application
before the expiry of two years from the relevant date in such form and manner as may be prescribed. The term refund has been defined in explanation to Section 54 which reads as follows: Refund includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of the unutilized input tax credit as provided under subsection (3).

• Sub-section (3) to Section 54 allows a registered person who is engaged in the provision of zero-rated supplies to claim a refund of an unutilized input tax credit. The
term input tax credit does not differentiate between input tax credit on inputs, input services, and capital goods. Therefore, even this implies that Section 54 also
entitles the refund of the input tax credit on Capital Goods.

Rule 89(4) provides the formula as per which refund shall be granted and this reads as follows: In the case of zero-rated supply of goods or services or both
without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of the input tax credit shall be granted as per the following formula –Refund Amount = Net ITC x T/o of Zero-rated
supply of Goods +Services/Adjusted Total Turnover.

• “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed
under sub-rules (4A) or (4B) or both.
• The above-referred formula defines Net Inputs Tax Credit means input tax credit availed on inputs and inputs services thereby excluded the input tax credit availed on capital goods. Consequently, the persons engaged in zero-rated supplies are not getting the refund of the input tax credit on capital goods.
• The question that arises is whether the Rule which prescribes the procedure for claiming the refund can override the entitlement given to the person making zero-rated supplies under Section 16 of IGST Act, 2017 and Section 54 of CGST Act, 2017.
• Section 16 of IGST Act, 2017 is the substantive provision that provides unconditional absolute rights to a registered person for claiming refund of unutilised input tax credit which includes the input tax credit on Capital Goods as well.

Even Section 54 of CGST Act, 2017 entitles the person making zero-rated supplies to claim a refund of the input tax credit on Capital Goods.
• It is a settled law that rules cannot override the statute and if overrides, the same becomes ultra vires the statutes and become invalid.
• Government vide Circular No. 18/18/2017-GST, dated 16-11-2017 clarified that ITC on capital goods is not refundable under the LUT option. This can be challenged.
• From the above-referred provisions, there is a possibility of getting the refund
of the input tax credit on Capital Goods as well.

 

 

 

 

 

 

 

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