Refund of ITC on input services under Inverted Duty Structure: All eyes on Apex Court

The Hon’ble Supreme Court to pass one of the most awaited verdict on the matter of grant of refund of unutilized input tax credit (‘ITC’) availed on input services under the inverted duty structure.

Under the GST laws, the instances, where the tax rates on the inward supply of goods and services are higher than the tax rates applicable on outward supplies made during the course of business, are referred as inverted duty structure. In these sceararios, the suppliers often face the problem of ITC accumulation, even after its adjustment of its outward tax liabilities.

To avoid this genuine hardship faced by suppliers, the GST law allows the refund of unutilized ITC to the suppliers.

Explanation to Rule 89(5) of the CGST Rules, 2017 restricts the benefit of such refund only to the extent of the ‘goods’ procured by the supplier. This means that the refund of input tax paid on ‘services’ cannot be availed.

In the case of VKC Footsteps India Pvt. Ltd. v. UOI [2020] 118 taxmann.com 81 (Gujarat), the Hon’ble Gujarat High Court held that the above Explanation is ultra vires to the provisions of the Act as the CGST Act categorically provides that refund of ‘unutilized Input tax credit’ and Rules cannot go to disallow a benefit which is granted by the parent legislation.

Contrary to the above decision of the Hon’ble Gujarat High Court, the Hon’ble Madras High Court passed an order in favour of revenue in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. UOI- [2020] 119 taxmann.com 324 (Madras). It was held that the benefit of refund can be availed only to the extent of unutilized ITC that accumulates on ‘goods’, thereby exclusion of unutilized ITC accumulated on ‘services’ in case of inverted rate structure is valid.

Various other WRIT petitions are filed before the High Courts and owing to the pendency of large number of petitions before the High Courts, the Hon’ble Supreme Court has decided to take up the matter for its final hearing on April 28,^, 2021.