Refund of Excess ITC (Circulars cannot override ACT)

Mr.X had purchased goods at a GST rate of 18%/12% and supplied Goods to IIT Research Wing at the rate of 5% GST.(Eligible as per notification no. 45/2017)

" CIRCULAR cannot override ACT ",There are many supporting case laws for this line also.

As per Circular No. 135/05/2020 – GST dated 31st March, 2020,Point no.'s 3.1,3.2 (https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular_Refund_135_5_2020.pdf)

" It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same."

As per Section 54(3) of the CGST Act, 2017(https://www.cbic.gov.in/resources//htdocs-cbec/gst/Refund%20of%20unutilised%20ITC%20in%20%20GST_Web.pdf;jsessionid=996ED277E2D4A5672221262A0520FDAA)

" Inverted duty structure: 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. In such cases also, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017. It should be noted that no refund of unutilised input tax credit is allowed in cases where the goods exported out of India are subjected to export duty. Further, no refund of input tax credit is 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."

My question is as follows

The circular issued by department on refund is overriding the wordings in the act. So whether Mr.X can claim refund of such excess ITC due to rate variation based on the ACT?

Hi Siva,

Your question about whether Mr. X can claim refund of excess ITC due to an inverted duty structure despite the department’s Circular seems quite important.

Key points to consider:

Section 54(3) of CGST Act, 17
- It clearly allows refund of unutilized ITC where the rate of tax on inputs is higher than the output supplies (inverted duty structure), except certain notified supplies.
- The law recognizes refund in such scenarios but also specifies certain exceptions (nil-rated, exempted supplies, etc.).
Circular No. 135/05/20 – GST
- The Circular clarifies that refund under clause (ii) of sub-section (3) of section 54 is available only when the input and output are not the same goods or services.
- It states that if input and output supplies are the same goods/services (though taxed differently), refund under inverted duty structure is not applicable.
Your Question: Circular overriding Act?
- Circulars and notifications are meant to clarify or guide the implementation of the Act but cannot override or amend the Act itself.
- If the language of the Act allows refund and the Circular restricts it more narrowly, the Act prevails.
Case Laws and Legal Precedents
- As you mentioned, various case laws emphasize that Circulars cannot override the Act.
- Courts have often held that if there is a conflict, the provisions of the statute must be followed over Circulars or instructions.

Practical Interpretation:

If Mr. X’s case strictly fits the definition of an inverted duty structure (inputs taxed higher than outputs), and there is no exemption or other restriction mentioned in the Act, he should be entitled to claim refund of excess ITC as per Section 54(3).
The Circular's restriction regarding ‘same goods or services’ should not legally deny refund if the Act permits it.
However, in practice, tax authorities may rely on the Circular to deny refund claims, leading to disputes.

What to do?

Mr. X should file for the refund claim based on Section 54(3) and keep supporting documents ready.
If the refund is denied citing the Circular, Mr. X may need to challenge the denial through the appellate process (CIT(A), Tribunal, or High Court).
Legal opinion and litigation may be needed if the tax authorities reject the claim based solely on the Circular.

Summary:
Yes, Mr. X can claim refund of excess ITC based on the clear provisions of the CGST Act, and the Circular cannot legally override the Act. However, practical hurdles may arise, so be prepared to support the claim through appeals if required.