In the field of indirect taxes, certain rulings pronounced by the Supreme Court of India are christened landmark judgments — either because the judgement is on a much-litigated topic or because the law was not clear.

In the service tax era, decisions of the apex court in the Tamilnadu Kalyana Mandapam case (whether service tax would be applicable to mandap -keepers), UOI vs State of Uttar Pradesh (whether sale of a SIM card is a sale or a service) and Home Solution Retail (whether service tax would be applicable for rent of buildings) could be called landmark judgments.

Under GST, the recent decision of the apex court in the VKC Footsteps case could be one of the early landmark judgments. The issue before the Supreme Court was whether the refund on inverted duty structure (where GST on inputs is higher than GST on outputs) is available for both inputs as well as input services.

The background to the case before the Supreme Court was that the Gujarat High Court had ruled that refunds should be given both for inputs as well as input services while the Madras High Court had ruled that it should be given only for inputs and not for services. After a detailed discussion, the Supreme Court toed the line of the Madras High Court and ruled that refund would not be available in case there are input services.

Refund on inputs

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 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.

There was a request made to the Supreme Court to rule on changing the formula for refund such that 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. This would keep the refund entitlement to the minimum.

The Court observed that the present formula tilts the balance in favour of the Revenue by reducing the refund granted. The proposed solution of prescribing an order of utilisation of the ITC accumulated on input services and inputs may tilt the balance entirely in favour of the assesses. The Supreme Court strongly urged the GST Council to reconsider the formula and take a policy decision on it.

The policy decision should 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. Courtesy this judgments, the taxpayer only loses his right to claim a refund — the credit would be in his credit ledger and can be utilised to pay GST on taxable supplies.

The underlying theme of the arguments made in favour of permitting a refund for input services was that a distinction should be not made between goods and services in an Act that is titled “Goods and Services Tax Act”. If the government was keen on distinguishing between goods and services, it might as well have passed a separate Sale of Goods Act and a separate Rendering of Services Act.

The GST rate on most services is 18 per cent whereas there are quite a number of goods that are taxed at 12 per cent and 5 per cent — only the exclusive members of goods in the 28 per cent tax slab would not be eligible for a refund of taxes paid.

In the past, the government has always reacted by amending the laws whenever landmark judgments are pronounced by the Supreme Court. Can we expect a reaction in the September 17 meeting of the GST Council?

The writer is a chartered accountant

Related Topics
comment COMMENT NOW