As per proviso to Section 54(3)(ii) of the CGST Act, 2017 refund can be granted in situations of inward duty structure, only in respect of inputs (goods) and not in respect of input services. This differential treatment has been subject matter of litigation as it is unreasonable as well as impact the tax payers as they are not able to avail refund of GST paid on input services which remains unutilised , in case they are operating in a situation of inverted duty structure.
Gujarat High Court has already allowed refund of unutilised ITC on input services under inverted duty structure:
We all remember that Gujarat High Court in a landmark judgment , in the case of VKC Footsteps India Pvt. Ltd vs Union of India & 2 other(s), have been directed the Revenue to allow the claim of the refund considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Section 54(3) CGST Act,2017.
Writ before Madras High Court: Hearing concluded
On the similar issue a writ was also filed before Madras High Court challanging constitutional validity in the GST refund provisions of Section 54(3) of the CGST Act,2017.
Madras High Court has concluded hearing in above writ after marathon arguments lasting over 12 days (from 17th August to 28th August).
Arguments from the Revenue:
Goods and services form distinct class and legislature has wide latitude in matters of taxation in terms of granting of refunds and can pick and choose whom they can or cannot grant refund.
Arguments of Petitioner:
- The Counsel of petitioner rebutted the above plea of Revenue stating that the distinction between goods and services in so far as refund of ITC in case of inverted duty structure is concerned , is an invidious discrimination going against the grain of Doctrine of Tax Neutrality and Equality and that Article 14 needs to be viewed from the “Frame of Reference” perspective and not in isolation.
- If tangibility is the frame of reference then surely goods and services are different class, but if frame of reference is tax neutrality then goods and services cannot be considered as falling within different class as same now form part of single Genus in the context of the architecture of GST.
- Any artificial distinction and micro classification between them visavis grant of refund goes against root of objective of GST and voilates Article 14.
- Referring to US Constitutional law , Petitioner further argued that Seperate but Equal doctrine propounded in Plessy vs Fergusan itself went through a complete change in Brown vs Board of Education after almost 65 years.
Concluding remarks:
It is expected that Madras High Court in line with Gujarat High Court will also hold that proviso to Section 54(3) of the CGST Act, 2017 is discriminatory and will allow the refund considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Section 54(3) CGST Act,2017.
However lets wait for the issuance of order by Madras High Court.
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