The Hon’ble Gujarat High Court has pronounced a landmark judgement in the case of VKC Footwear on 24.07.2020 and has held that the formula used for calculation of refund of “Net ITC” under the inverted tax structure can cover both input and “input services” as well.
It is stated that the restrictions provided in Rule 89(5) of the CGST Rules are beyond the extent of Section 54 of the CGST Act as the said section allows refund of the unutilised input tax credit (ITC) due to inverted tax structure. There is no specific mention of inputs or input services separately. Hence, it is settled that the provision covers both inputs and input services.
It is also noted that the Input Tax Credit (ITC) as defined in Section 2(63) means the credit of input tax as well. The word Input Tax as defined in Section 2(62) states “the tax charged on any supply of goods or services or both made to any registered person”; whereas the word input as defined in Section 2(59) relates to “any goods other than capital goods” and input service under Section 2(60) means that any service used or intended to be used by a supplier.
Further, clause (i) of Section 54(3) of the CGST Act also points to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST Rules.
Therefore, it is held that input and input service both are a part of the input tax and ITC.
Rule 89(5) of the CGST Rules, 2017 defines a formula for the calculation of the amount of ITC refund on account of inverted duty structure. This restriction in the formula appears as irrational as the Act did not restrict service providers from claim of refund and Rules could not override an Act.
“The maximum refund amount is equal to {(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.”
The word “Net ITC” used in this formula is defined as input tax credit availed on inputs only during the relevant tax period.
Hence, the High Court directed that input services should also be eligible for ITC refund due to the inverted tax structure.
Our Comments:
Now, an assessee can claim a higher refund of unutilised ITC under the inverted tax structure. It is a significant relief for the industries functioning under such tax set up such as the textiles, railway locomotives & parts, handlooms, solar modules, e-commerce, steel utensils, mobiles, and many more.
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