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When it comes to claim the refund of Input Tax Credit lying in the Electronic Credit ledger of the registered person, provision of section 54(3) lays down the circumstances in which refund of Input Tax Credit will be available to the registered person which he has accumulated over the period of time. Also, it is vital for the registered person to look into the permutation and combination of refund options in order to make sure that he is able to claim the maximum refund while ensuring that working capital of his business is not stuck into taxes. Thus, in as much as refund under inverted duty structure is concerned, it is exigent to produce section 54(3) of the Central Goods and Services Tax Act, 2017 (hereinafter referred as CGST Act, 2017) as under:

Refund under Inverted Duty Structure and Verdicts

"Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilized 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:

Provided further that no refund of unutilised 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.'

From the bare pursuit of the above provision it is clearly evident that the refund of Unutilised Input Tax Credit (ITC) shall be allowed in below mentioned circumstances:

• Zero Rated Supplies without payment of Tax
• Supplies under Inverted Duty Structure

The above provision also looks after saving the government revenue from certain situations wherein the exporters could claim double benefit:

a. No refund of accumulated credit if exported goods are subject to export duty;
b. No refund of accumulated credit if exporter claims drawback of CGST;
c. No refund of accumulated credit if exporter claims refund of IGST paid on exported goods.

Albeit, the purpose of this article is to examine two major issues of refund under Inverted Duty Structure:

i. One being, whether refund of Input Tax Credit in case of Zero Rated Supplies is admissible, where Integrated Tax has been paid (i.e. LUT/ bond option is not availed) and still inverted duty structure is applicable on such supplies (i.e. rate of inputs is higher than that of outward supplies).

ii. Another being, whether the refund of Input Tax Credit on Inputs and Input Services be claimed in case of Inverted Duty Structure.

Whether refund of Input Tax Credit in case of Zero Rated Supplies is admissible, where Integrated Tax has been paid (i.e. LUT/ bond option is not availed) and still inverted duty structure is applicable on such supplies (i.e. rate of inputs is higher than that of outward supplies):

At this juncture, in order to examine the legal position in case of first question, it is pertinent to note that second proviso to section 54(3) puts the condition that refund under the said provision cannot be claimed where the tax payer claimed the refund of Integrated Tax Paid. Provision of section 16(1) of Integrated Goods and Services Tax Act, 2017 (hereinafter referred as IGST Act, 2017) defines what are the Zero Rated Supplies and further provision of section 16(3) administers the circumstances of refund in case of Zero Rated Supplies subject to the provision of section 54 of CGST Act, 2017 or rules made thereunder. Sec. 16(3) hypothesize for eligibility to claim refund in case of Zero Rated Supplies where tax (IGST) has been paid or where such supplies has been made under Letter of Undertaking or Bond as the case may be. The bare provision is reproduced as under:

"Sec. 16 (3): A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:-

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

(b) he may supply goods or services or both, subject to such 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.'

At the outset, it is paramount to note that while referring to provision of section 16(3) for Zero Rated Supplies where the registered person avails the option of paying integrated tax on the Zero Rated Supplies, in such case, the refund of the taxes which have been paid on supplies, can only be claimed as refund. Here, the moot question as mentioned above is whether the assessee can claim refund of Unutilised Input Tax Credit which remains unutilized into the electronic credit ledger after the refund of IGST has been claimed. Combined reading of section 54(3) and proviso thereof and Sec. 16 of IGST Act, gives the impression that refund of unutilized Input Tax Credit will not be available to the assessee if he has exported the goods by following the payment of IGST. It may be noted that the intention of third proviso to section 54(3) is to bar exporter from claiming refund of the same amount of tax under two different mechanisms by taking the undue benefit. However, the government has always intended to give full benefit to exporters, but in the given circumstance, working capital to the extent of unutilized input tax credit is tucked into government treasury and working capital of exporters is severely impacted. Alternatively, the exporters, where inverted duty structure is applicable, should not opt for paying IGST and then claiming refund and should claim refund of unutilized ITC per se. Albeit, the given view is subject to the cost benefit analysis carried out by the taxpayer before applying for refund under either of the two options (as in case of refund under inverted duty structure another outcome may follow - discussed in the later part of this article).

Whether the refund of Input Tax Credit on Inputs and Input Services be claimed in case of Inverted Duty Structure:

While referring to the provision of section 54(3) of CGST Act, 2017, it bestows that the refund of unutilized input tax credit shall be available to the taxpayer, where the rate of tax is higher on inputs than that of output supplies and such goods or services are not notified by the government on which refund will not be available. Here, the underlying issue is, whether the clause (ii) of sec. 54(3) restricts the taxpayer to claim the refund of only inputs or the refund of unutilized ITC shall be available. If we refer the provision it starts like "any person may claim refund of unutilized input tax credit'. And while referring to the definition of input tax credit in terms of section 2(63) i.e. credit of input tax, which in turn refers to the definition of input tax as defined in section 2(62) i.e. input tax paid on goods or services as the case may be. Thus, unutilized ITC is basically the ITC on Inputs, Input Services and Capital goods. However, when clause (ii) of section 54(3) is referred, it merely defines the inverted duty structure. Whereas, the doubt which arises is that whether it can restrict the refund claim upto ITC on inputs. Till now by looking at the provision of section 54(3), it can be inferred that since the provision provides for refund of UNUTILISED ITC when the condition of inverted duty structure is satisfied, thus it is just the condition which is required to be fulfilled to claim the refund of unutilized ITC. Meaning thereby, clause (ii) of sec. 54(3) merely defines the inverted duty structure and gives the power to notify the supplies which despite being the inverted duty structure will not be eligible for refund and not restricts the refund claim per se.

Further, rule 89(5) computes the maximum amount of refund available under Inverted Duty Structure, which reads as under:

"Rule 89(5)

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

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.

 

Explanation:- For the purposes of this sub-rule, the expressions –

(a) 'Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under subrules (4A) or (4B) or both; and

Adjusted Total turnover and 'relevant period shall have the same meaning as assigned to them in sub-rule (4).'

From the perusal of the above rule, it is evident that when computation for maximum amount for refund is done, it only considers the NET ITC, which in turn has been defined as input tax credit availed on Inputs. It is also pertinent to note that the said rule was amended vide notification no. 21/2018-CTR and 26/2018-CTR, whereby the term Input services was removed from the definition of Net ITC. Albeit, while comparing the same with provision of section 54(3), it is pertinent to note that the delegated legislation restricts the scope of refund claim of the taxpayer to the extent of input tax credit on inputs only. It is a well settled principle of the law that procedural law cannot override the substantive law. Thus, in the moot issue, section 54(3) is the substantive law, which nowhere restricts the claim of refund of unutilized ITC in any manner and the procedural law i.e. Rule 89(5) is restricting the claim of refund upto the amount of ITC on inputs. Hence, it can be said that Rule 89(5) is ultra vires to the enabling provision i.e. section 54(3) and cannot be applied.

Advance Ruling - Daewoo TPL JV [Maharashtra AAR]:

The moot issue of refund claim under Inverted Duty Structure was raised before Maharashtra Authority for Advance Ruling in case of DAEWOO-TPL JV [2019-TIOL-233-AAR-GST], whereby it was observed that mechanism of Rule 89(5) is to be followed in order to compute the refund in terms of section 54(3)(ii) i.e. under inverted duty structure and does not allow the refund of ITC availed on Input Services and remaining unutilized in whole or part thereof.

Thus, the said advance ruling was not issued in the favor of the applicant and was against the true spirit of the law.

Writ Petition - ShabnamPetrofils Private Limited [2019-TIOL-1656-HC-AHM-GST]

In the said writ petition, the question of law which was raised before hon'ble Gujarat High Court was that whether the provision of section 54(3)(ii) of CGST Act, 2017 can disallow the refund of unutilized ITC on account of Input services, whereby the ITC is very well eligible in terms of section 16 and scope of the said provision is only to notify the supplies for which refund will not be available. While addressing the said issue, the Hon'ble Court has observed as under:

 

"(viii) The CGST Act itself provides for the lapsing of the ITC at Sections 17(4) and 18(4) respectively of the CGST Act. Thus, where the legislature wanted the ITC to lapse, it has been expressly provided for in the Act itself. No such express provision has been made in Section 54(3) of the CGST Act.

(ix) No inherent power can be inferred from the provision of Section 54(3) of the CGST Act empowering the Central Government to provide for the lapsing of the unutilised ITC accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies (inverted rate structure).

(x) The members of the writ applicants have a vested right to unutilised ITC accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies.

(xi) It is a well-settled principle that the delegated legislation has to be in conformity with the provisions of the parent statute. By prescribing for lapsing of ITC, the Notification No.05/2017-C.T. (Rate) dated 28.06.2017, as amended by Notification No.20/2018-C.T. (Rate) dated 26.07.2018, has exceeded the power delegated under Section 54(3)(ii) of the CGST Act.

(xii) In view of the above, proviso (ii) of the opening paragraph of the Notification No.05/2017-C.T. (Rate) dated 28.06.2017, inserted vide Notification No.20/2018-C.T. (Rate) dated 26.07.2018, is ex-facie invalid and liable to be struck down as being without any authority of law.'

Henceforth, the said judicial verdict is clearly manifesting that the scope of provision of section 54(3)(ii), is just to notify the supplies on which refund of unutilized ITC will not be available and notification issued notifying the Rule 89(5) and restricting the refund of unutilized ITC on input services is without authority of the law and is liable to be struck down.


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Category GST, Other Articles by - Neha Sethi 



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