The Supreme Court on Monday upheld the validity of a rule of the Central Goods and Service Tax, which prescribes a formula excluding the refund of unutilised input tax paid on input services as part of input tax credit (ITC).
A bench comprising Justices D.Y. Chandrachud and M.R. Shah upheld the validity of Rule 89(5), overturning a 2020 Gujarat High Court judgment which had held that Rule 89(5) was ultra vires Section 54 (3) of the CGST Act, 2017. Rule 89(5) of the CGST Rules provides for the computation of the refund of ITC on account of an inverted duty structure. The rule was amended on April 18, 2018, with prospective effect, to ensure that refund of unutilised ITC can only be availed on input goods.
The bench said, “When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilised ITC cannot be accepted.” Such an interpretation, if carried to its logical conclusion, would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions, it added.
The bench noted that in the field of taxation, the top court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable.
“In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities,” said the top court, in its 140-page judgment.
The bench noted the purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. “Once the principle behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot be struck down merely for giving effect to the same,” it said.
The top court said, however, given the anomalies pointed out by the assessees, “we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same”.
It observed the formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services.
The top court also upheld the Madras High Court ruling in a separate connected matter. “We have come to the conclusion that the judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed,” it said.