Refund of Input Service credit under Inverted Duty Structure – Allowed or Not !!

We all know how GST Mechanism generally works in India. We pay GST on our purchases, claim the credit of such GST, make outward sales, net-off the GST payable on sales with credit of GST & pay the balance GST amount to the government. But what if GST paid on our inward supplies becomes more than GST payable on our outward supplies.? In that case, we don’t need to pay anything extra for our outward supplies. Instead, the GST we have already paid on our purchases will start accumulating with the GST Department. Hence in such a case, we need to claim the refund of such accumulated GST amount according to section 54 of the GST Act.

We should also be well versed with the GST refund process, to which taxpayers GST refund service is available and hire any professional for such purpose. Suppose we want to claim a refund from the GST Department of Delhi. We can avail the services of a GST refund consultant in Delhi or a GST refund expert in Delhi so that our refund can be processed hassle-free.

In this article, we attempt to comprehend the Refund of Input Tax Credit in the case of Inverted Duty Structure. We will start from the meaning of the topic & then dive into the topic much deeper.

Input Tax Credit: Credit of GST paid on the purchase of goods & services used in the course or furtherance of business.

Inverted Duty Structure: Case wherein GST tax rate on inputs is higher than the GST tax rate on output supplies.

Section 54(3): A taxpayer may claim a refund of any unutilised input tax credit at the end of any tax period in the following cases, subject to some documents required for GST refund:

1: zero-rated supplies made without payment of tax;

2: Inverted Duty Structure

Exceptions: No refund of the unutilised input tax credit shall be allowed in the following cases:

1: Nil rated or fully exempt supplies;

2: Supplies as notified by the government like construction services;

3: Goods exported out of India subject to export duty and

4: If the supplier avails of drawback regarding central tax or claims refund of the integrated tax paid on such supplies.

Input Tax Credit in Inverted Duty Structure: 

1: Rule 89(5) provides a formula about the refund of ITC on account of inverted duty structure. In this rule, the term “Net ITC” is being used, which means input tax credit availed on inputs & as per section 2(59), Input means any goods other than capital goods.

2: Now, section 54(3) does not restrict the claim of ITC refund only for inputs, rather for input services as well.

3: While Section 54(3) allows for a refund of ITC for inputs as well as input services, Rule 89(5) gives a contradictory statement by including only input goods in the purview, and

4: If we follow the formula of Rule 89(5), it will create a distinction between inputs and input services.

High Court of Gujarat:

1: There is also a famous case in this regard named “VKC Footsteps India Pvt. Ltd. v. Union of India”. In that case, the Division Bench of the Gujarat High Court held that:

 “untilised input tax paid on “input services” in case of inverted duty structure shall also be allowed as a refund.”

2:The High Court, therefore, directed the Union Government to allow the claim for a refund of unutilised ITC on input services as part of “Net ITC” to calculate for the purpose of Rule 89(5).

High Court of Madras:

1: However, in the case of “Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India”, Division Bench of the Madras High Court refused to follow the view of the Gujarat High Court & came to a contrary conclusion. It was held that:

“benefit of refund shall only be available to the unutilised credit that accumulates on input goods and unutilised input tax credit that accumulated due to input services shall be excluded for refund.”

2: In simple words, refund of unutilised ITC shall be available for input goods and not for capital goods & input services.

Supreme Court Ruling

1: As there were contrary judgements by High Court of Gujarat & Madras matter went to Supreme Court, and it upheldthe Judgment of the Madras High Court whereas the decision of Gujarat High Court will be set aside.

2: Therefore, Refund in cases of Inverted Duty Structure would be based on ITC on Inputs (Goods) only.

Current Scenario:

1: Now, the Supreme Court judgement did not bring an end to controversy or litigations in this matter. The question “whether refund will be granted” becomes more important than “how to claim GST refund”.

2: There have been instances wherein the GST Department has issued a Refund order allowing the refund of unutilised ITC on account of input services and issued DRC-07 just after sometime rejecting the claim of refund.

3: It has created a distinction between the suppliers having a higher component of input goods than those with a higher input service element and will discourage the suppliers from availing input services considering the above judgement that ITC Refund will not be available on such inward supplies, affecting the service industry.

4: On the flip side, it will also create new problem areas & new cases for litigation matters, generating new business avenues for litigation professionals.

5: Till today, Supreme Court judgment is upheld & refund of ITC is available only for input goods.