Refund of Pre-deposit in VAT to be made in cash in GST Regime u/s 142(6)

The Madras High Court has ruled that pre-deposits made under the previous VAT regime, even if paid using Input Tax Credit (ITC), must be refunded in cash following the implementation of GST. This decision, based on Section 142(6) of the CGST Act, clarifies that departmental circulars cannot override statutory provisions. Therefore, if a tax demand is dropped, the pre-deposit must be returned to the taxpayer in cash, as ITC from the VAT regime cannot be carried forward or adjusted under GST.

The Hon'ble Madras High Court in Larsen and Toubro Ltd. v. Deputy Commissioner (ST)-II [W.P. Nos. 28371, 28375 and 28378 of 2021 dated September 26, 2024]  held that any pre deposit made under the VAT regime by debiting input tax credit (ITC) must be refunded in cash after the implementation of GST. The department cannot refuse to refund by relying on departmental circulars when Section 142(6) of the Central Goods and Services Tax Act, 2017 ("the CGST Act") mandates refund.

Facts

Larsen and Toubro Ltd. (‘the Petitioner’) is a Ready Mix Concrete (RMC) who collected freight and pumping charges from clients separately and treated them as post-sale expenses that are not part of taxable value.

The GST Department (‘the Respondent’) , initially accepted this treatment but later issued revision orders that included these charges in taxable value and demanded tax.

The Petitioner challenged the revision orders before the High Court, which directed him to pay 10% pre-deposit of the tax amount to which he complied by depositing the amount through ITC under the VAT regime.

Subsequently, a Division Bench of the High Court in State of Karnataka v. Bangalore Soft Drinks (P.) Ltd. [2001] 117 STC 413 and Ram Oxygen Private Limited v. Joint Commissioner of Commercial Taxes (1999) 115 STC 629 decided in favour of the Petitioner and held that freight and pumping charges cannot be included in taxable value.

Based on this, the revision orders were dropped and Form-C for refund was issued. However the department denied cash refund citing Circular No. 05/2015 stating that the amount can only be adjusted but not refunded.

The Petitioner filed a writ petition aggrieved by the denial of refund.

Issue:

Whether pre-deposit made under the VAT regime by using ITC must be refunded in cash after implementation of GST under Section 142(6) and whether a department circular can deny such refund.

Held:

The Hon’ble Madras High Court in W.P. Nos. 28371, 28375 and 28378 of 2021 held as under:

• Observed that the matter relating to the freight and pumping charges was already decided in favour of the Petitioner.
• Noted that the petitioner had paid the pre-deposit through VAT input tax credit and complied with the High Court order.
• Held that the pre-deposit amount must be refunded once the demand for tax is dropped under Section 142(6) as it clearly mandates refund in cash.
• Observed that the GST department cannot rely on Circular No. 05/2015 as the circulars cannot override statutory provisions.
• Noted that after the implementation of GST, the ITC of VAT cannot be carried forward or adjusted.
• Quashed the department’s refusal and directed refund within 30 days.

Our comments:

The judgements clarifies that statutory provisions under Section 142(6) of the CGST Act override all department circulars and administrative instructions thus making this an important judgement in transitional GST matters. The transitional provisions under GST are meant to protect taxpayer’s rights and ensure that amount paid under the old regime are refunded or adjusted.

The Court rightly held that once the dispute is decided in favour of the taxpayer and especially when VAT law has been repealed after GST implementation when the demand is dropped, the pre-deposit made under the VAT regime must be refunded in cash.

Revenant Provision:

Section 142 (6) - Miscellaneous transitional provisions.

(a) every proceeding of appeal, review or reference relating to a claim for CENVAT credit initiated whether before, on or after the appointed day under the existing law shall be disposed of in accordance with the provisions of existing law, and any amount of credit found to be admissible to the claimant shall be refunded to him in cash, notwithstanding anything to the contrary contained under the provisions of existing law other than the provisions of sub-section (2) of section 11B of the Central Excise Act, 1944 (1 of 1944) and the amount rejected, if any, shall not be admissible as input tax credit under this Act:

Provided  that no refund shall be allowed of any amount of CENVAT credit where the balance of the said amount as on the appointed day has been carried forward under this Act;

(b) every proceeding of appeal, review or reference relating to recovery of CENVAT credit initiated whether before, on or after the appointed day under the existing law shall be disposed of in accordance with the provisions of existing law and if any amount of credit becomes recoverable as a result of such appeal, review or reference, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under this Act and the amount so recovered shall not be admissible as input tax credit under this Act.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED