GST Rules on Refund of Input Tax Credit on account of Inverted Duty Structure challenged before HC [Read Order]

Rule 89(5) of the Central GST Rules, 2017 and Rajasthan GST Rules, 2017 relating to the refund of input tax credit on account of inverted duty structure has been challenged in the Rajasthan High Court, Jodhpur Bench (Principal Seat) wherein High Court has issued notices to Union of India, Government of Rajasthan and GST Council and sough their reply within four weeks’ time.

Petitioner Shree Ram Products Private Limited through its advocate Sanjay Jhanwar and Prateek Gattani stated that proviso (ii) to sub section (3) of Section 54 provides that refund of any unutilized input tax credit (ITC) may be claimed by the registered person in case where credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. However, Ministry of Finance, Government of India and Finance Department, Government of Rajasthan vide notification dated 18.04.2018 made an amendment in the definition of definition of Net ITC as envisaged under Rule 89(5) of the CGST / RGST Rules, with retrospective effect to restrict / not consider the input tax credit availed and accumulated on account of input services while computing the maximum amount of refund. Whereas, prior to said amendment definition of Net ITC includes the unutilized input tax credit availed on input as well as on input services.

Petitioner’s advocate argued that, provisions of Rule 89(5) of the CGST/ RGST Rules provides for refund of tax paid on input only without considering and appreciating the fact that the output supply is result of the input as well as input services. It is a reality that without use of input services in the manufacturing sector e.g. without availing services of Goods Transport Agency, Repair and maintenance of plant & machinery / factory building, legal and accountancy services, Job Work etc., it is not possible to supply output goods and services accordingly. Hence, allowing refund of only input tax as availed/charged on inputs per is unreasonable, irrational, discriminatory and defective in nature. Further, there is no apparent justification for excluding tax paid on input services from the purview of Net ITC for computing the refund amount under inverted duty structure.

Petitioners advocate further argued that Rule making power as envisaged by the Government under section 54(1) of the CGST / RHST Act is just to regulate the refund. No rules can be framed under the guise of such power which curtail the right of the Petitioner which is otherwise absolute in the Code. Petitioner advocate further relied on State of Mysore and Ors. vs Mallick Hashim & Co. (SC) (1974) 3 SCC 251.

Further, restraining the refund of input tax credit availed on input services would lead to result in blockage of funds / working capital in the form of tax paid on input services and affecting the cost competitiveness of small businesses and also paralyzing their  working capital / liquidity which is an essential key for their survivor. The treatment of Input and Input Services on different yardsticks and making input tax credit on input eligible to be considered part of Net ITC and tax paid on Input Services ineligible for being considered as part of Net ITC, is against the principal of the fiscal neutrality and seamless flow of the credit which are the foundation principles of the GST.

Matter was heard by the bench consisting of Chief Justice and Justice Dinesh Ji Mehta. Notice have been issued by the Hon’ble High Court to the Respondents and sought their reply within a period of 4 weeks.