Supreme Court maintains the ITC refund provisions of the CGST Act

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admin November 8, 2021
Updated 2021/11/08 at 7:03 AM

On Monday, the Supreme Court affirmed a Madras High Court decision that maintained a fiscal formula contained in the Central Goods and Service Tax Rules for executing refunds of unused Input Tax Credit (ITC) accrued on account of input services.

In the face of two contradictory decisions from the Gujarat and Madras High Courts on the legality of Rule 89(5) of the Central Goods and Service Tax Rules, 2017, the supreme court bench headed by Justice D.Y. Chandrachud issued the ruling.

In the event of a return due to an inverted tariff structure, Rule 89(5) gives a method for calculating the ITC refund.

The Gujarat High Court held in the VKC Footsteps case that the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act, which provides for a claim of refund of any unutilised ITC accumulated on account of input services, by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilised ITC accumulated on account of input services.

In instances involving zero-rated supplies provided without payment of tax and credit accumulation “on account of the rate of tax on inputs being greater than the rate of tax on output supplies,” Section 54 provides for a reimbursement of unutilized input tax credit2.

The Madras High Court, in its decision in the Tvl. Transtonnelstory Afcons Joint Venture case, refused to adopt the Gujarat High Court’s decision. The proviso to Section 54(3), and, more importantly, its consequences, do not seem to have been considered in the VKC Footsteps case, save for a short mention.

“Section 54(3)(ii) does not violate Article 14 of the Constitution” (right to equality). 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 accumulates on account of input services is a valid classification and an exercise of legislative power, according to the Madras High Court.

Despite the formula’s “inequities,” the Bench decided that it did not deserve to be overturned.

The court said, “We strongly encourage the GST Council to review the formula and make a policy decision on the same.”

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