Input services refund vis-à-vis inverted duty structure

A constant tug of war was going on between the departmental officer and the registered person under GST with regard to refund claims of input services in case of an inverted duty structure. Notably, due to contradictory views taken by two High Courts, the matter even went up to the Supreme Court. Post observation put forth by the Supreme Court, resulting in a recommendation by the

47th GST council meeting, hopefully, the matter is going to rest down soon in favor of the taxpayer. The entire controversy relating to the refund claim of input services in the case of inverted duty structure; various important litigations and judgments thereof and recommendations by the 47th GST council meeting is detailed in the current article.

Understanding the controversy relating to the refund claim of input services in case of inverted duty structure

Before going into the nitty-gritty of relevant refund provisions, firstly, let us understand what is inverted duty structure. ‘Inverted duty structure’ refers to a situation, wherein, the GST rate on inputs/ input services is more than the GST rate payable on outward supplies. Due to the ‘inverted duty structure’, the taxpayer will naturally not be able to utilize the full amount of input tax credit. Hence, in order to tackle the situation, the Government came up with the refund claim of such accumulated input tax credit arising due to an inverted duty structure. Provisions of section 54(3) of the Central Goods and Services Tax Act, 2017 cover the situations wherein a refund is available in case of an unutilized input tax credit. Accordingly, such a refund is available in the case of ‘zero-rated supply’ and ‘inverted duty structure’. Further, provisions of Rule 89(5) of the Central Goods and Services Tax Rules, 2017 covered the formula on the basis of which the refund claim on account of inverted duty structure is granted to the taxpayer. Notably, since the inception of GST, the formula provided under rule 89(5) covered both refunds of Input Tax Credit on inputs as well as input services. However, the controversy began with the issuance of notification no. 26/2018-CT dated 13

th June 2018 [Central Goods and Services Tax (Fifth Amendment) Rules, 2018] which substituted entire sub-rule (5) to rule 89. Interestingly, the amendment to the formula was given retrospective effect from 1st July 2017. The substituted rule 89(5) and the formula thereof are explained hereunder –

Maximum refund amount on account of inverted duty structure

[(Turnover of inverted rated supply of goods/ services) X Net ITC ÷ Adjusted Total Turnover] – tax payable on such inverted rated supply of goods/ services

Notably, the controversy lies here, explanation (a) to rule 89(5) states that Net ITC means input tax credit availed on inputs (not input services) during the relevant period. Post issuance of notification no. 26/2018-CT dated 13

th June 2018, making the above formula effective from 1st July 2017, the departmental officer started rejecting the refund claim of input tax credit availed on input services in case of inverted duty structure.

Relevant important judicial rulings

Going through two contradictory High Court judgments and the final Supreme Court judgment will clear up the entire matter.

In the case of VKC Footsteps India Pvt. Ltd. V/s. Union of India, Hon’ble Gujarat High Court has held that provisions of explanation (a) to rule 89(5) of the Central Goods and Services Tax Rules, 2017 denying refund claim of unutilized input tax credit paid on input services is ultra vires to the provisions of section 54(3).

Accordingly, the Gujarat High Court directed the departmental officers to allow the refund claim of any unutilized input tax credit of input services as well in the case of an inverted duty structure.

Contradictory, in the case of Tvl. Transtonnelstroy Afcons Joint Venture V/s. Union of India, Hon’ble Madras High Court held that the provisions of section 54(3)(ii) don’t overstep Article 14. Accordingly, it is a valid exercise of legislative power to provide a refund of only inputs in case of any unutilized input tax credit.
Supreme court, as per Civil Appeal number 4810/2021 dated 13/10/2021, affirmed the judgment of Hon’ble Madras High Court (which rejected refund application of input services) and dismissed the judgment of Hon’ble Gujarat High Court (which allowed the refund claim of input services).

However, Hon’ble Supreme Court observed and agreed that the formula covered under rule 89(5) suffers from some anomalies. Hon’ble Supreme Court directed that the Government should clear up the said anomalies.

Relevant recommendation by the 47th GST council meeting

Based on the direction of the Hon’ble Supreme Court, finally, the matter was taken up for discussion in the 47

th GST council meeting. Accordingly, as per the recommendation of the GST council, the formula prescribed under rule 89(5) should be amended and it should take into account the utilization of ITC on both inputs and input services. Post recommendation from the 47th GST council meeting, which was held on 28th June and 29th June 2022, we will hopefully soon see a new notification with new formula covering both input tax credit availed on inputs as well as input services in case of inverted duty structure.

Summary

The following points wind up the entire controversy and the present position of the same –

From 1st July 2017, rule 89(5) of the Central Goods and Services Tax Rules, 2017 covered refund of both inputs and input services in case of accumulation of input tax credit due to inverted duty structure;
Central Goods and Services Tax (Fifth Amendment) Rules, 2018, introduced vide notification no. 26/2018-CT dated 13th June 2018, substituted the rule. New rule 89(5) covered only refund of inputs in case of accumulation of input tax credit. The rule was made effective retrospectively from 1st July 2017;
Supreme court, vide Civil Appeal number 4810/2021 dated 13/10/2021, rejected the refund claim of input services in case of inverted duty structure. However, pointed out the anomalies and directed the Government to clear the same;
47th GST council meeting recommended that the formula covered under rule 89(5) should be amended and it should cover refund claims of both inputs and input services in case of the unutilized input tax credit;
Based on GST council recommendation, now only issuance of notification is pending. Once the notification is issued the matter will reach its final destination and a refund of both inputs and input services will be available in case of an inverted duty structure.

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Frequently Asked Questions

Common questions about Input Services Refund and Inverted Duty Structure GST Guide.

An inverted duty structure refers to a situation where the GST rate on inputs or input services is higher than the GST rate payable on outward supplies. In such cases, the taxpayer is unable to fully utilize the input tax credit, leading to an accumulation of credit.

A refund is necessary in case of an inverted duty structure because the taxpayer cannot fully utilize the accumulated input tax credit due to the higher GST rate on inputs or input services compared to the rate on outward supplies. The refund mechanism ensures that the taxpayer is not burdened with the accumulated credit.

Section 54(3) of the Central Goods and Services Tax Act, 2017, and Rule 89(5) of the Central Goods and Services Tax Rules, 2017, cover the provisions related to the refund in case of an inverted duty structure.

The controversy arose due to a contradictory interpretation of Rule 89(5) by different High Courts. While one High Court allowed the refund of input tax credit on input services, another High Court rejected it. This led to the matter being taken up to the Supreme Court.

The Supreme Court affirmed the judgment of the Madras High Court, which rejected the refund application for input services. However, it acknowledged the anomalies in the formula prescribed under Rule 89(5) and directed the Government to address them.

The 47th GST Council meeting recommended amending the formula prescribed under Rule 89(5) to take into account the utilization of input tax credit on both inputs and input services in case of an inverted duty structure.

Currently, the refund claim for input services in case of an inverted duty structure is not allowed based on the Supreme Court's judgment. However, a notification is expected to be issued soon, based on the GST Council's recommendation, to amend the formula and allow the refund of both inputs and input services.

The amended formula under Rule 89(5), allowing the refund of both inputs and input services in case of an inverted duty structure, will benefit taxpayers by reducing the burden of accumulated input tax credit and improving their cash flows.

Taxpayers should closely monitor the issuance of the notification regarding the amended formula under Rule 89(5). Once the notification is issued, they should review their eligibility and follow the prescribed procedures to claim the refund of input tax credit on both inputs and input services in case of an inverted duty structure.

While the article does not mention specific conditions or limitations, taxpayers should carefully understand the eligibility criteria, documentation requirements, and any other conditions outlined in the relevant provisions and notifications issued by the Government to ensure compliance and successful claim of the refund.