Refund of input tax credit for input services cannot be claimed: Supreme Court
The apex court also asked the GST Council to look into the anomalies related to the issue.
Inverted duty refers to tax on inputs being higher than the duty on a finished product.
The top court in its order set aside appeals filed against a Madras High Court judgement on the matter and affirmed the lower court’s decision in favour of the revenue department.
“The judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict, while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed,” a division bench of Justice DY Chandrachud and Justice MR Shah said in the order.
The Madras HC had held last year that Section 54(3) of the Central Goods and Service Tax (CGST) Act – which allows for a refund of Input Tax Credit (ITC) where the accumulation is due to an inverted duty structure – does not infringe on Article 14 of the Constitution. It said that refund of tax paid on inputs and not input services was available under the inverted duty structure.
The Gujarat High Court, on the other hand, had held in a separate case that prescribing a formula under Rule 89(5) of CGST rules – which excluded refund on account of input services as part of the refund of unutilised ITC – was contrary to Section 54(3) of the Act. Therefore, one could claim a refund of tax credit for input services.
The apex court bench said it would not read down or interpret the formula for granting refund in cases of inverted duty structure, even though assessees argued that it created a distinction between suppliers having a higher component of input goods than those having a higher component of input services.
The top court said any inequities that had emerged out of the formula would have to be ironed out by the government as the Court would not ‘walk into the shoes of the executive or the legislature.’
“While we are alive to the anomalies of the formula, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation… we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same,” the apex court said.
Experts said the Court’s decision would provide much needed clarity on the matter after the contradictory views by the High Courts of Madras and Gujarat, but may also lead to blocking of ITC for companies eligible for such refunds.
“The Apex Court has passed a landmark judgement to remove the doubts. The industry players would hope that the government would reconsider the anomalies pointed out by the assessees in this petition and recraft the formula in a better manner,” said Abhishek Jain, tax partner at EY.
However, Ritesh Kanodia, partner at Dhruva Advisors LLP, said the decision was a setback to taxpayers. “This would result in a substantial blockage of input service tax credit for some taxpayers who are eligible for such refunds,” he said.
“It is hoped that the government will amend the law to also allow the refund for input services in the future considering that the intent is to achieve an ideal GST framework and in the meanwhile at least amend the formula to remove the anomaly agreed to by the Supreme Court,” Kanodia said on the court’s decision to ask the GST Council to take a relook at the formula.