SC ruling: Industry hopeful that GST council will look at ITC refund anomalies

Meenakshi Verma Ambwani New Delhi | Updated on September 13, 2021

Observation on anomalies seen as a key positive by the industry

The Supreme Court’s decision to allow Input Tax Credit (ITC) on just goods inputs in inverted tax structure under the Goods & Services Tax while computing refund, and not on input services, has come as a disappointment for sectors such as textiles, footwear and solar power. However, thesesectors, which have been hit the most by the decision, have taken heart from the Court’s observation that the GST Council should look into existing anomalies, and hence, want to pursue the matter further.

“While we must respect the judgment of the SC, the issue may not have reached finality... The Court has noted some anomalies and suggested the GST Council to look into the same. One needs to consider various aspects, before taking a final decision on future course of action for MSMEs…,” a Delhi-based GST consultant pointed out.

The judgment is likely to mostly affect small and medium enterprises in pharmaceuticals, textiles, fertilisers and footwear space, as they depend significantly on job work, which is classified as services, and hence, not eligible for input tax refund.

“Large units generally get everything manufactured inside as they are more integrated. It is mostly smaller textile units that depend on job work and outsource numerous activities such as dyeing, stitching, weaving and embroidery. It involves considerable payouts. In a situation where money supply is already tight for the MSME sector, denying them input tax refund adds to their woes,” said Sanjay Jain, Chairman, National Textile Committee, Indian Chamber of Commerce.

Job work as service

Although job work is classified as service, it is actually a manufacturing activity, pointed out Jain, adding that it is not like a normal service-like audit, where fee is relatively a negligible component of costs. “The more important thing is that you are not allowing it to be adjusted in your GST output obligation. If that was allowed, the industry would first adjust the amount and the balance is to be refundable in ITC,” Jain said. He added that the possibility of some units appealing against the SC verdict could not be ruled out.

“The judgement of the Gujarat High court was a welcome one wherein they had not restricted the refund of input tax credit to only inputs but also allowed the refund for input services. With the SC rejecting the said judgement, the impacted industries will have a scenario with substantial amount blocked in input tax and no possibility of refund leading to working capital issues,” pointed out Parag Mehta, Partner, NA Shah Associates.

While the Court has refrained from reading down the computation as prescribed in Rule 89(5), it has strongly urged the GST Council to reconsider the formula and take a policy decision regarding the same, said Abhishek Jain, Tax Partner, EY.

“Industry players would hope that the government would reconsider the anomalies pointed out by the assessees in this petition and recraft the formula in a better manner,” he said.

Published on September 13, 2021

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