Gujarat High Court ruling gives relief to fabric manufacturers

In what could be seen as a major relief for the textile sector, the Gujarat High Court has made it clear that input tax credit (ITC) accumulated up to July 31, 2018 will not lapse. This will facilitate refund of the credit for that period and thus end the working capital woes for fabric manufacturers.

The core of the issue is the inverted duty structure which results in a situation when there is a higher duty on raw material/input and higher duty on finished product. In such a situation, technically speaking, refund is to be provided. In case of the textile sector, man-made fabric attracts GST (Goods & Services Tax) at the rate of 5 per cent while inputs for that attract levy at the rate of 12 per cent.

As power loom and man-made fabric manufacturers were facing problems, the Central Board of Indirect Taxes (CBIC) issued a circular saying that refund will be possible from August 2018 but accumulated ITC till July 2018 will lapse. Aggrieved by this, various companies and association of fabric weavers (power looms) filed petitions in the Gujarat High Court.

“The impugned Notification dated July 26, 2018 bearing No.20/2018 and Circular dated August 24, 2018 bearing Circular No.56/30/2018-GST to the extent it provides that the input tax credit lying unutilised in balance, after payment of tax for and up to the month of July 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse, are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of section 54(3)(ii) of the CGST Act, as section 54(3)(ii) of the CGST Act does not empower to issue such notifications and consequently, it is held that the petitioners and members of the petitioners are entitled for the credit and it be granted to them,” a Division Bench of the court said in its ruling.

Earlier, the Revenue Department argued that GST reduction on man made fibre yarn to 12 from 18 per cent gave significant relief to the sector and reduced the accumulation of ITC . As there were requests for relaxing conditions related with refund of accumulated credit, the GST Council agreed to remove the condition, however with the prospective effect.

The Council then decided that the input tax credit lying in balance on the date of the notification implementing the new provision will lapse. This lapse of accumulated ITC was in the spirit of earlier rate structure which envisaged that refund of accumulated credit was not to be allowed and accordingly circular was issued.

However, the Court did not agree with the contentions and said that no inherent power can be inferred from the provision of GST Law empowering the Centre to provide for the lapsing of the unutilised ITC accumulated on account of inverted rate structures. The petitioners have a vested right to unutilised ITC accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies.

According to Anita Rastogi, Indirect Tax Partner with PwC, it is a well settled law as per Supreme Court ruling in the past that credit is indefeasible and this order of High Court of Gujarat reaffirms this position.

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