Goods and Services Tax (GST) was launched in India on July 1, 2017 after for about a decade from the time it was first proposed. Approximately 17 transaction taxes and 23 Cesses were replaced with GST. The new tax regime sought to achieve numerous objectives such as removing the cascading effect of taxes under the erstwhile regime, enabling seamless flow of credits, promoting ‘Ease of doing business’ by simplifying the procedures etc.

The new tax regime has completed first anniversary last month. The Government must be given due credit for being responsive to various demands of the Industry in having accommodated many amendments to the “as implemented version”. But there are still host of some issues which need attention and one of them is refund of accumulated credit arising due to inverted duty / tax structure.

While the easiest form of implementation could have been to have a one rate structure all across, in the words of the Union Finance Minister himself, “a BMW and Hawai Chappal can’t have the same tax”. India therefore chose to adopt a multi-rate structure giving due regard to the “socio-economic considerations”. With this arose a situation where while, in certain cases, the final supply attracted a lower rate of say 5% or 12%, procurements (inputs, input services or capital goods) were / are subject to a higher rate of say 18% or 28%, resulting in credit accumulation. While the legislation was drafted to accommodate for refund of such accumulated credit, it is the interpretation of the provision and subsequent amendments in CGST Rules which created a bit of confusion in the minds of the members of industry.

Relevant provisions

First proviso to Section 54(3) of the CGST Act, 2017, states that,

“no refund of unutilised input tax credit shall be allowed in cases other than–– (i) zero rated supplies made without payment of tax; (ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.” The formula for maximum refund amount prescribed under Rule 89(5) of the CGST Rules, 2017 included turnover for inverted rated supply of goods only (inverted rated supply of services was initially not included therein). Further, explanation to Rule 89(5) stated that for the purpose of the sub-rule, the expression “Net ITC” shall have the same meaning as assigned to it for refund of accumulated ITC on account of zero rated supplies under Rule 89(4). According to Rule 89(4), "Net ITC" means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both. Thus, it appeared that refund of GST under Inverted duty structure is available only to supplier of goods, but for both Inputs and input services.

The amendments

According to Instruction No. 8 to Form GST RFD-01 (form for claiming refund), such net ITC was to include inputs only for the purposes of refund under inverted duty structure creating a confusion as to whether the expression “inputs” used in Section 54(3) should be interpreted in terms of the definition of inputs under Section 2(59) and if so, refund for capital goods and input services cannot be availed or, should the provision be interpreted as if refund of all of the unutilized ITC is permitted once credit has been accumulated on account of rate of tax on inputs being higher than that of output?

Thereafter, Rule 89(5) was amended by way of Notification No. 21/2018-Central Tax dated 18th April, 2018 wherein, the formula for maximum refund amount was amended to specifically include the turnover of inverted rated supply of services as well in a welcome move for service providers. However, the Notification also amended the scope of expression “Net ITC” to specifically remove Input services therefrom (earlier cross reference to Rule 89(4) was removed). This was a strong signal to restrict the refund in respect of input services under inverted duty structure. Thereafter, a retrospective amendment was carried out to the CGST Rules (by Notification No. 26/2018-Central Tax dated 13th June 2018) to substitute the formula for “Maximum refund amount” and the scope of “Net ITC” under Rule 89(5) with effect from July 1, 2017.

Does ‘inputs’ include ‘input services’

Restricting refund under inverted duty structure to inputs only is unreasonable and may not have been intended. It can be said so considering the specific relief provided by the government to include inverted rated supply of services as well in the formula for calculation of maximum refund amount. Under the Central Excise or Service Tax regime, there were no provisions for refund under an Inverted duty / tax structure. While GST sought to provide relief to such suppliers of service by allowing refund, who are such suppliers of service who predominantly use inputs for supplying services? While construction industry could have been one such example, such services have been specifically restricted from refund by way of Notification No. 15/2017-Central Tax (Rate) dated 28th June 2017. Other service providers which predominantly use inputs can be job workers, works contractors etc. However not all job workers and works contractors would be covered under inverted rate as lower rate on output has been prescribed only for specific use (say works contract for Railways, job work in relation to textiles, etc.). Further, such a provision for refund may not have been drafted keeping in mind only a select few out of all the inverted rated suppliers, but for a large mass. Therefore, who are the intended beneficiaries?

It may further be noted that Section 54(3) uses the expression “inputs” which are not defined under the CGST Act as the word ‘input’ alone has been defined. While it is a general principle that a word defined in the statute will also include the meaning in plural sense, however if such an interpretation is adopted it would imply that no refund would be allowable for input services. It is however to be noted that Section 2 of the CGST Act begins with the expression “unless the context otherwise requires”. The Supreme Court has in the past noted that there may be instances when the meaning assigned to a word in the statute may have to be departed from when the context so requires.

In the case of Printers (Mysore) Ltd. v. Assistant Commercial Tax Officer reported at [1994] 93 STC 95 (SC), the Supreme Court allowed the appeal of the appellant to allow submission of Form C for procurement of raw materials required for printing and publishing newspapers. The authority had sought to disallow the claim for concessional rate on procurements on the ground that concessional rate of 4% is prescribed only for goods purchased by the dealer for use in the manufacture or processing of goods for sale. Newspapers were specifically excluded from the definition of goods under Section 2(d) of the Central Sales Tax, 1956 (hereinafter referred to as the CST Act, 1956) and accordingly, they are not covered under “for manufacture or processing of goods for sale”. The Apex Court noted that Section 2 of the CST Act, 1956 begins with “unless the context otherwise requires”.

“This shows that wherever the word "goods" occurs in the enactment, it is not mandatory that one should mechanically attribute to the said expression the meaning assigned to it in clause (d). Ordinarily, that is so. But where the context does not permit or where the context requires otherwise, the meaning assigned to it in the said definition need not be applied. If we keep the above consideration in mind, it would be evident that the expression "goods" occurring in the second half of section 8(3)(b) cannot be taken to exclude newspapers from its purview”.

“…Even apart from the opening words in section 2 referred to above, it is well-settled that where the context does not permit or where it would lead to absurd or unintended result, the definition of an expression need not be mechanically applied.”

In another case of Commissioner of Sales Tax, Gujarat vs. Union Medical Agency reported at [1981] 47 STC 170 (SC), the Apex Court had noted that where the context makes the definition clause inapplicable, a defined word when used in the body of the statute may have to be given a meaning different from that contained in the interpretation clause. The court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words in a particular section.

By relying on the above judgements, it can be said that the context of refund under inverted duty structure requires interpretation of the expression “inputs” as all procurements including input services used in making outward supplies. Accordingly, even input services should be eligible for refund therein. Considering that goods and services are taxed equally, the refund provision should also equally apply for input services as well and restricting refund on input services merely because they are not covered by the expression “inputs” may be unreasonable and absurd.

Not refunding duty attributable to input services is resulting in accumulation of ITC, which goes against the intention of free flow of ITC under GST and is adding to the cost of making such supplies. While a host of amendments to the CGST Bill have been passed recently by the Parliament recently, Section 54(3) still remains the same- even after demands from the industry to either amend the law or issue appropriate clarification. A writ petition has also been filed before the Rajasthan High Court challenging the provisions of Rule 89(5). It is time that the government either brings in suitable amendments or issue appropriate clarification to ensure that refunds are allowed for input services also under inverted duty structure to remove the unreasonable hardship for the industry.