[First Published by Taxmann ]

Given the centrality of Input Tax Credit (ITC) in the framework of GST, the issue surrounding lapse of unutilized ITC arising out of inverted duty structure have acquired newfound prominence especially when it involves lapse of accumulated unutilized ITC. Simply put, Inverted Duty structure refers to a scenario wherein the GST on output supplies is less than the GST on the input supplies utilized for the production of output supplies. As a consequence of inverted duty structure, the higher tax paid of input supplies get accumulated in the Electronic Credit Ledger of the taxpayer resulting in entrapment of liquidity in a business cycle causing immense loss to the business community.

The substantive and procedural process for refund of such unutilized credit is provided under Section 54 of the CGST Act.[i] As per Section 54(3) of the CGST Act, 2017, refund of accumulated ITC would be granted where the credit accumulation has taken place on account of inverted duty structure i.e. where the credit has accumulated on account of rate of tax on input being higher than the rate of tax on output supplies.[ii] In the context of refund due to inverted duty structure, Section 54(3) (ii) of the CGST Act provides that such refund shall be disallowed on supplies of goods or services or both as may be notified by the government on the recommendations of the GST Council.

Pursuant thereto, CBIC issued Notification No. 5/2017- Central Tax (Rate) whereby it notified the goods in respect of which no refund of unutilised input tax credit shall be allowed, where the credit has accumulated on account of rate of tax on input being higher than the rate of tax on the output supplies of such goods. The notification came into force w.e.f. 01/07/2017. The said Notification was amended vide Notification No. 20/2018- Central Tax (Rate) dated 26/July/2018 whereby it was provided that in respect of said goods, the accumulated input tax credit lying unutilised in balance after payment of tax for and upto the month of July, 2018 on the inward supplied received up to the 31 Day of July 2018 shall stand lapsed. The net effect of the aforementioned Notification was that the portion of accumulated unutilized ITC on inward supplies that stood unutilized upto 31 July/2018 stood lapsed. Circular No. 56/30/2018- GST, dated 24th August, 2018 clarified that the condition of lapsing of ITC would apply only if ITC on inputs has been accumulated on account of inverted duty structure.

While the Circular No 56/30/2018- GST, dated 24th August, 2018 provides that the legislative power of providing for lapsing of input tax credit flows inherently from the power to deny refund of accumulated ITC on account of inverted structure, the legal provision and its application has been marred with legal challenges. Writ Petitions challenging the constitutionality and validity of delegated legislation are pending before Rajasthan,[iii] Gujarat[iv] and Bombay High Court[v] respectively. In light of recent pronouncements upon the issue by Gujarat High Court in Shabnam Petrofils Pvt Ltd v. Union of India,[vi] this article would assess the constitutional and other challenges raised by the petitioner. In Shabnam petrofils, Petitions sought a writ of mandamus for quashing the notification dated 26-07-2019 and Circular no 56/30/2018- GST dated 24.08.2018 as being contrary to Section 54(3) of the CGST Act.

 LAPSE OF ACCUMULATED UNUTILIZED ITC UNDER SECTION 54(3) (ii) OF THE CGST ACT

The submissions of the petitioner can be categorized into three separate heads

  1. That a registered person’s right to claim input tax credit arises from Section 16 of the CGST Act and the same cannot be tempered with under Section 54 which ostensibly deals with refunds under the CGST Act.
  2. That there is no statutory power under the CGST Act empowering the Revenue to issue notification providing for lapse of ITC under Section 54 of the CGST Act. Moreover, the power under Section 54(3)(ii) of the CGST Act is limited to notifying the supplies not entitled to refund of  accumulated ITC as per the scheme laid down under Section 54 of the CGST Act.
  3. That ITC can be equated with tax paid by the assesse and a valid claim of input tax credit under the CGST act creates an indefeasible right in the favour of the taxable person that cannot be taken away by a process not recognized by the Statute.

Power to issue notification providing for lapse of ITC

This submission is premised upon an understanding that a notification providing for lapse of unutilized ITC cannot be issued under the power vested in Section 54(3) of the CGST Act. As per the petitioner, the power under Section 54(3)(ii) of the CGST Act is limited to notifying the supplies not entitled to refund of input tax credit accumulated on account of the inverted rate structure. Per contra, Revenue argued that CBIC vide Circular No. 56/20/2018-GST, dated 24th August, 2018 has clarified that the legislative power of providing for lapsing of input tax credit flows inherently from the power to deny refund of accumulated ITC on account of inverted structure. To this end, Pardiwala J pointed out that the section 17(4) and 18(4) of the CGST Act provides for the scheme that governs the lapse of the ITC availed by the registered person. Furthermore, it was held that no inherent power can be inferred from the provision of Section 54(3) of the CGST Act empowering the Central Government to provide for the lapsing of the unutilised ITC accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.

The scope of enquiry insofar as power to issue notification for lapse of accumulated unutilized ITC revolves around two questions. Firstly, whether the import of Section 54 of the CGST Act extends beyond notifying the supplies not entitled to refund of ITC? Secondly, whether the denial of refund of unutilized ITC can be equated with power to cause lapse of the unutilized ITC availed?

The characterization of the Section as being limited notifying the supplies not entitled to refund of ITC is consistent and well-placed. Given the usage of double exclusion in the section, an entry in the notification under Section 54(3) (ii) of the CGST Act would act as denial of refund of unutilized input tax credit where the credit has accumulated on account of rate of tax on input being higher than the rate of tax on output supplies.

The conclusion of Circular No 56/20/2018- GST insofar as it locates the power to lapse of Unutilized ITC under power to deny refund under Section 54(3) of the CGST Act is misconceived principally on two grounds.

The term ‘lapse’ indicates abatement, termination and decline in the character or the nature of the object. In this context, it is argued that the denial of refund and lapse of ITC are fairly independent power with distinct consequences. The power of denial of refund operates merely to restrict the refund without having any effect upon the underlying subject while the power to cause lapse brings about an irreversible effect upon the nature of the unutilized ITC availed by the registered person. In the present case, a notification under Section 54(3) (ii) cannot be permitted to temper with the character of the underlying unutilized ITC availed by the registered person.

Secondly, Section 54 cannot unilaterally impose any restriction and qualifications upon the nature, role and value of the Input tax credit availed by the registered person. Sub- Section (1) of Section 16 prescribes that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49 be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business. The term ‘entitled’ implies “to give a claim, right or title to; to give a right to demand or receive, to furnish with grounds for claiming”.[vii] Herein, two points have to be highlighted. Firstly, Section 16 explicitly provides that any modification as to the entitlement to take credit for input charged has to be in the manner specified in Section 49 and be subject to such conditions and restrictions as may be prescribed in this regard. Thus, the power to cause lapse i.e. abatement and/or termination of the unutilized ITC must originate under and be subject to prescriptions and prohibitions of Section 16 of the CGST Act.  Secondly, Section 16 postulates that an entitlement to avail ITC is subject to Sub-section 2 and 3 of Section 16 of the Act. Thus, any lapse of accumulated ITC that is not controlled by Section 16 unfairly injures the entitlement of the registered person to avail ITC for supplies made by the registered person. The power to cause lapse of ITC is a subset of powers that revolve around the entitlement of ITC and govern the eligibility, conditions and operation of ITC subject to the conditions and restrictions so prescribed by the legislative scheme. The usurpation thereof by a Notification under Section 54(3) (ii) tantamount to an impermissible intrusion into the scheme conceptualized for availment and utilization of ITC under CGST Act.

Vested right to availment of ITC under Section 16 of the CGST Act

The Petitioners submitted that a valid claim of input tax credit under the GST Act creates an indefeasible right in the favour of the taxable person. A vested right has been defined as an absolute or indefeasible right and immediate fixed right in present or future enjoyment in respect of the property. The word ‘vested’ has been defined in Black’s Law Dictionary as fixed; accrued; settled; absolute; and complete.[viii] In other words, a right is vested when right to enjoyment, present or prospective, has become property of some particular person or personas as present interest. A  vested right must have a “legitimate” or “settled expectation” and must not be based merely on expectancy of future benefits or contingent interest in property founded on anticipated continuance of existing laws. The absolute and infeasible nature entails that such right can only be taken away if the law specifically or by necessary implication provides for such a course.[ix]

At this juncture, it is important to assess whether the entitlement to avail ITC under Section 16 of the CGST Act can be classified as a vested right or not?

In Shabnam Petrofils, the vested right to unutilised ITC was recognized by relying upon on two earlier pronouncements of the Court. In Eicher Motors Ltd. v. Union of India[x], Petitioners challenged the validity and application of Rule 57-F of the Central Excise and Salt Act, 1944 under which credit lying unutilized on 16-03-1995 with the manufacturers stood lapsed.  Petitioners argued that the MODVAT credit lying in balance with assesse being a vested right cannot be taken away by the Government under Section 37of the Central Excise Act, 1944. The Court held that Section 37 of the Act does not enable the creation of Rule 57-F upon goods manufactured on which duty has been paid and credit facility thereto has been availed of for the purpose of the manufacture of further goods. Therefore,  a ‘vested right’ crystalizes when the assesse has already paid the tax on the inputs on the basis that when the goods are utilised in the manufacture of further products as inputs thereto, then the tax on these goods gets adjusted which are finished subsequently. The right gets accrued to the assesse on the date when the assesse concerned pays the tax on the input supplies and the right would continue until the facility available thereto gets worked out or until those goods existed. In Collector of Central Excise v. Dai Ichi Karkaria Ltd,[xi] the indefeasible entitlement to use credit accrued after the manufacturer obtains credit for central excise duty on raw material and makes the requisite declaration and obtains an acknowledgment thereon.  In the present case as well, the entitlement to avail ITC as provided for in Section 16 of the CGST Act crystalizes when the registered person avails the same on input supplies for use thereof in production of output supplies by the registered person. Consequently, a registered person possesses a vested right to accumulated unutilised ITC implying that a lapse thereof must be in such manner and subject to such conditions as prescribed by the statute.

In conclusion, the Court held that the impugned Notification Dated 26.07.2018 bearing No. 20/2018 and Circular dated 24.08.2018 bearing Circular No 56/30/2018- GST to the extent it provides that the ITC lying unutilized in balance, after payment of tax for and upto the month of July, 2018, on the inward supplied received upto 31st Day of July, 2018, shall lapse be quashed and set aside and declared ultra vires and beyond the scope of Section 54(3)(ii) of the CGST Act.

CONCLUSION

The judgment of the Gujarat High Court is welcome addition to the growing jurisprudence of GST in general and provisions of refund in particular. Although the present controversy stems predominantly from the transition related complexities of GST, the clear enunciation of the import of Section 54 of the CGST Act is much appreciated. This ruling,  by realigning the Section 54(3)(ii) of the CGST Act with the meaning and objective of the Explanation 1 to Section 54 of the CGST Act, has evolved a much consensus on the scope of operation of Section 54 of the CGST Act.

[1] Section 54 stipulates that a registered person may claim refund of any unutilized input tax credit at the end of any tax period.

[II] Additionally, Rule 89(2)(h) of the CGST Rules, 2017 stipulates that refund claim on account of accumulated ITC has to be accompanied by a statement containing the number and date of invoices received and issued during a tax period.

[III] Shree Ram Lime Products (P) Ltd. v. Union of India, DB Civil Writ petition No 1137 of 2018.

[IV] Scorpio Enterprise v. Union of India, Special Civil Application No. 14980 of 2018 dated September 27, 2018.

[V] Bombay Well Print Inks (P) Ltd. v. Commissioner, Goods & Services Tax Council, Writ Petition NO 1292 of 2019.

[VI] [2019] 108 Taxmann.com 15 (Gujarat).

[VII] Law Lexicon, P Ramanatha Aiyar

[VIII] Black’s Law Dictionary (6th Edition) 1563.

[IX] J.S. Yadav v. State of U.P, (2011) 6 SCC 570.

[X] 1999 (106) ELT 3 (S.C.).

[1] 1999 (121) ELT 353 (S.C.).

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