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The Supreme Court on Monday held that inverted duty refund is admissible only with respect to inputs and not for input services, thus putting to rest the doubts after contradictory views by the High Courts of Madras and Gujarat. However, the apex court pointed to some anomalies in the computation formula for refund and urged the GST Council to look into them.
Impact on many sectors
The decision will have an impact on companies engaged in the manufacture of footwear and textiles as also those in the e-commerce business.
“We affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court,” a Division Bench of Chief Justice Dhananjaya Y Chandrachud and Justice MR Shah observed, while disposing of a bunch of 14 petitions.
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The Gujarat High Court had held that refund of input services was admissible while the Madras High Court had ruled against it. The apex court upheld the amendments made to Rule 89 (5), restricting such refund only for inputs and said that it is not ultra vires of Section 54 of the GST Act. It also observed that the intention of the government is to grant such credit only for inputs and the Court cannot enter into the policy domain of the government and direct the sanction of refund for input services also.
According to experts, though there will be an impact, the ruling has not closed options for the players.
On behalf of intervenors, G Natarajan, an advocate from Chennai, made an alternative plea before the Supreme Court that the input services credit must first be allowed to be used to pay tax on the inverted rated supplies though the formula mandates the entire tax liability is paid only out of input credit, so as to keep the refund entitlement to the minimum. The Court observed that “In making such an assumption the formula tilts the balance in favour of the Revenue by reducing the refund granted. We are equally cognizant of the fact that the proposed solution, that is, prescribing an order of utilisation of the ITC accumulated on input services and inputs, may tilt the balance entirely in favour of the assesses.”
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Further, it strongly urged the GST Council to reconsider the formula and take a policy decision on it.
Tushar Aggarwal, Founder Partner, Tattvam Advisors, said: “The decision will impact footwear, solar power, textile, EPC and various other industries that are under the inverted duty structure and have substantial ITC of input services.”
Will end litigations
Aditya Singhania, Founder, Singhania’s GST Consulatncy & Co, said that the verdict puts an end to the litigation that were arising pan-India seeking refund on input services also. Yet, it’s not a dead loss for taxpayers as the credit remains alive in their credit ledger.
Though the judgment gives the GST Council the room to relook the formula prescribed under Rule 89(5), to propose a mechanism by which the ITC on input services, otherwise not eligible for refund, is utilised first even while reducing the tax payable on the inverted rated supply of goods and services. “However, it appears that unless such a mechanism comes into place, the ruling will have some influence on the prices to the end-consumers as the GST on these input services seems to get offloaded on the end-consumers,” he said.
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