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Tax Alert: Gujarat High Court allows refund of GST paid on input services in ‘inverted tax’ situations

31 July 2020


Many industries like foot ware, fertiliser, jewellery, etc. have been experiencing severe strains in monetising the GST credit accumulated on input services, ever since the roll-out of GST legislation in 2017. Rule-89 (5) of CGST Rules, 2017 (the Rules), which deals with calculation of refund of inverted tax, was retrospectively amended in April 2018 to remove benefit of ITC refund on ‘input services’ and restricted it to ‘inputs’ alone.

In the instant case, a batch of petitions was filed before the Hon. Gujarat High Court challenging the vires of Rule-89(5) on the grounds that the principle and scheme of GST/VAT across the world or the GST Act of India does not seek to deny refund of accumulated input service credit.

Taxpayer’s argument

The taxpayer argued that Section-54(3) does not limit the benefit only to GST paid on the ‘input’ alone; Section-2(62) of the Act encompasses ‘tax charged on any supply of goods or services or both’ within the scope of the definition of the term ‘input tax’. Further, Section-2(63), defines ‘input tax credit’ as ‘the credit of input tax’, thus the refund of tax under Section-54(3) is not restricted to ‘inputs’ alone. A subordinate legislation i.e. Rule-89(5), cannot overstep the legislative mandate and thus the explanation of ‘Net ITC’ inserted in the rule is ultra vires the Section-54(3) of the Act, which is liable to be struck-down to grant refund. The taxpayer also argued that Section-54(3) does not empower the government to frame rules in the context of refund of inverted taxes, and general rule making authority of government under Section-164(1) to notify rules is only for carrying-out provision of the Act; thus amendment to Rule-89(5) in contravention to Section-54(3) is not legitimate.

Court conclusion

Accepting the views of the taxpayer, the Hon. High Court has held that Rule 89 (5) which excludes refund of tax paid on “input service” as part of the refund of unutilised ITC is contrary to the provisions of Section 54(3) of the Act which provides for claim of refund of “any unutilised input tax credit”. Moreover, clause (ii) of proviso to Section-54(3) also refers to both supply of goods or services and not only supply of goods as per amended Rule-89(5). The Court observed that it is of the opinion that Explanation (a) to Rule-89(5), which denies the refund of unutilised input tax paid on input services as part of accumulated ITC on account of inverted duty structure is ultra vires the provision of Section-54(3) of the Act.

BDO Comments

This is a significant development in the realm of claim of refund of GST paid on input service, where the GST on output tax rate is lesser than input tax rate. Many industries and associations have been agitating this matter at various fora and this comes as a relief to them. Government had prayed before the Hon. Gujarat to stay the operation, implementation and execution of this order, which was rejected by the Court. Thus, it is likely that this matter may re-emerge in the higher appellate forum in the coming times.