Madras HC finds excluding input services for calculation of refund in inverted duty structure correct

Shishir Sinha New Delhi | Updated on September 23, 2020 Published on September 23, 2020

e-commerce companies in fix after contrary rulings

E-commerce companies are in a fix as High Courts give divergent rulings on whether input services is included for calculating for claiming refunds in inverted duty structure.

On Monday, the Madras High Court has rejected bunch of pleas to allow GST assessees to have refund of input services under inverted duty structure. This is contrary to a ruling given by Gujarat High Court earlier. Experts said that two different rulings have put industry especially e-commerce companies in a fix.

“Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power,” a Division Bench of Madras High Court comprising Chief Justice Amreshwar Pratap Sahi and Justice Senthil Kumar Ramamoorthy said.

Inverted duty structure (IDS) means higher duty on raw material (inputs) and lower duty on final products (output). Several products such as footwear and furniture have this duty structure. Though there are provisions of refunds, the rules are complex, which makes it difficult for companies to claim refunds.

Revised formulae

The revised formulae for computing the refund under IDS, which was notified on June 13, 2018 and made effective retrospectively from July 1, 2017, excludes input services from the scope of ‘net input tax credit’ for computation of the refund amount under the rule.

The substituted rule (89(5) of the CGST Rules) denies refund availed against input tax credit on input services and allows only on input goods. The Bench dismissed the challenge to these provisions. In their pleas, the petitioner argued that Section 54(3) proviso creates a distinction between two assessees, which has no intelligible differentia or any nexus with the object sought to be achieved by the statute. On the other hand, the Tax Department submitted that goods and services form distinct class and legislature has wide latitude in matters of taxation in terms of granting of refunds and can pick and choose whom they can or cannot grant refund.

Earlier, Gujarat HC in case of VKC Footsteps had upheld the challenge to rule which excludes ITC on Input Services from the definition of ‘Net ITC’.

The HC expressed that “input” and “input service” are both part of the “input tax” and “input tax credit” and therefore, by way of Rule 89(5)of the CGST Rules, 2017, such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit.”

Commenting on Madras HC ruling, Harpreet Singh, Partner at KPMG said that on account of thin margins, most e-commerce companies have accumulated credit on input services under GST.

“Post VKC Footsteps ruling, such e-commerce companies were hopeful of getting refunds and consequent respite from inverted duty structure. This Madras High Court ruling could dampen the prospects of getting such refunds,” he said.

Nirmal Singh, Partner at Nangia Andersen LLP, said that the taxpayer equally pays tax for the inward supplies of goods and services whereas differential treatment for goods and services could lead to increase in the cost of supplies and deviates from the concept of GST.

“Now different judgments are leading to the confusion which will lead to the litigation and now can get settled at Supreme Court, till then taxpayers will have to deal with the rejection of refund for inward supplies of services on account of inverted duty structure leading to impact on cash flow,” he said.

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Published on September 23, 2020
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