UNION OF INDIA Vs. VKC FOOTSTEPS INDIA PVT LTD
The present article is a brief analysis of the Supreme Court verdict regarding the clarification for claiming of refund in case of inverted duty structure
In order have a better conceptual understanding we need to know what are the applicable legislative provisions referred in present case law
- SECTION 54(3) :
A registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
(i) Zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies),except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council ( inverted duty structure)
Provided further that no refund of un utilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
Formula to claim refund in case of Inverted duty structure is given in “Rule 89
Maximum Refund Amount = {(Turnover of inverted rated supply of goods) X Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods
Here, Net ITC means input tax credit availed on inputs during the relevant period other than input tax credit availed for which refund is claimed under rule 89(4A) or rule 89(4B)
Background analysis of the case law
The assesse is engaged in the manufacture and supply of footwear which attracts output tax @ 5%
The assesse procures input goods such as synthetic leather, PU polyol and input services such as job work service, goods transport agency service on payment of applicable GST for use in the course of business and avails ITC on the GST paid thereon. A majority of the input goods and input services attract tax at the rate of 12% and 18%
Since the rate of tax in case of outward supplies is greater than rate of tax in case of inward supplies , the assesse is eligible to claim refund of the unutilized input tax credit in this case of inverted duty structure
ACTION OF THE REVENUE:
The Revenue is allowing refund of accumulated ITC of tax paid on input goods such as synthetic leather, and PU Polyol. Further, the Revenue is allowing accumulation of ITC paid on procurement of input services such as job work service and goods transport agency service. However, the refund of accumulated unutilised ITC paid on input services is being denied and refund already granted has been recovered from the assesse.
SUBMISSIONS OF THE ASSESSEE:
The assesse is of the view that denying the refund for unutilized ITC on input services in case of inverted duty structure is inadmissible
Grounds of Appeal by the assesse are as follows:
- By interpreting Section 54 (3) it is said that any registered persons who fulfil the below two conditions are eligible to claim refund of ‘’any ‘’ unutilized ITC. So, we can conclude that it is a conditional section but not restrictive section.
- (i) And the main provision of section 54 (3) informs about the quantum of unutilized ITC that can be claimed as refund.
(ii) Whatever Input tax credit it might be related to input goods or input services or both can be claimed as refund if they satisfy the conditions . It is no way restricting the eligibility to claim refund to just input goods
- But formula given in rule 89(5) defines NET ITC as ITC in respect of input goods , which thereby restricts the refund of un utilised ITC to just input goods but not input services
- The rule making authority does not have any right to make a rule that contradicts the act , hence rule 89(5) is ultravires the act and cannot form basis for calculating the eligible refund
- VKC Footsteps India Pvt. Ltd. v. Union of India, the Division Bench of the Gujarat High Court judgment
“Explanation (a) to Rule 89(5) which denies the refund of “unutilised 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 High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3)
- VKC Footsteps India Pvt. Ltd. v. Union of India, the Division Bench of the Madras High Court judgment
The Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, which it has declined to follow. The Madras High Court has concluded that Section 54(3) does not infringe Article 14.
Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.
The writ petitions challenging the validity of Rule 89(5) on the ground that it is ultra vires Section 54(3)(ii) were dismissed.
The divergence between the views of the Gujarat High Court on the one hand, and the Madras High Court on the other, forms the subject matter of this batch of appeals.
- Supreme court verdict :
Considering various anomalies in the formula for calculating refund in case of inverted duty structure given in rule 89(5) supreme court passed a verdict to resolve them .
Hence In 47th GST council meeting CBIC vide Notification No. 14/2022-Central Tax dated 05-07-2022 has made an amendment in the formula under Rule 89(5) of CGST Rules, 2017 which now reads as under-
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – {tax payable on such inverted rated supply of goods and services x (Net ITC ÷ ITC availed on inputs and input services)}
Because of this amendment it would be beneficial for the assesse by increase in amount of refund