A ruling of Supreme Court in the case of Union of India & Ors. vs. VKC Footsteps India Pvt Ltd. has ended the uncertainty over whether refunds of unutilized input tax credit (ITC) are available for goods and services tax (GST) purposes on “input services” under an inverted duty structure. The high courts of Gujarat and Madras had given contradictory rulings on the subject and the Supreme Court’s ruling affirms the Madras High Court’s judgement that the restriction of the refund under GST law to unutilized ITC relating only to input goods and not input services is constitutionally valid. The ruling potentially has far reached and adverse effects on several key sectors of the Indian economy and at the Supreme Court’s request, the GST council subsequently has made recommendations seeking to mitigate these issues.
- Background of the Dispute:
- The controversy originated from conflicting rulings by the Gujarat and Madras High Courts regarding the refund of unutilized Input Tax Credit (ITC) under GST for an inverted duty structure.
- Gujarat High Court ruled in favour of allowing refunds for both input goods and services, while Madras High Court upheld the restriction to input goods only.
- Supreme Court’s Decision:
The Supreme Court affirmed the Madras High Court’s decision, limiting GST refund claims under an inverted duty structure to input goods, excluding input services.
- Arguments and Contentions:
Tax Authorities: Argued that the GST legislation intentionally restricts refunds to input goods to align with Parliament’s specified conditions for refund eligibility.
Taxpayers: Contended that the GST law allows for a refund of all unutilized ITC, including that on input services, and that the legislation does not justify a distinction between input goods and services for refunds.
- Supreme Court’s Observations:
The Court recognized Parliament’s authority to define refund eligibility criteria and found the restriction to input goods constitutionally valid.
It highlighted the legislative prerogative in taxation matters, emphasizing that refunds are not a constitutional right but are subject to statutory conditions.
- Implications for Various Sectors:
Sectors with high input services, like pharma, textiles, and footwear, could face increased costs due to the inability to claim refunds on input services, potentially affecting their competitiveness.
- Future Directions:
- The Supreme Court urged the GST Council to revisit the refund formula to address any inequities.
- Following the ruling, the GST Council recommended GST rate revisions and established a Group of Ministers to assess and propose adjustments to the tax rates and refund mechanism.
- Conclusion:
The ruling clarifies the scope of GST refunds under an inverted duty structure, limiting GST refund claims under an inverted duty structure to input goods, excluding input services. reinforcing the legislative framework’s validity while acknowledging the need for continuous evaluation and adjustment by the GST Council to mitigate adverse impacts on businesses.
For More Information please go below judgement link –
24110_2020_33_1502_29954_Judgement_13-Sep-2021.pdf (sci.gov.in)
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