Gujarat HC Holds That Net ITC Formula Includes Input Services

Recently, Gujarat High Court has pronounced a landmark judgement. It has held that the net Input Tax Credit (ITC) formula used for GST refund under the inverted tax structure can cover input services as well.

The judgement was passed on VKC Footwear where other matters were also clubbed. The restrictions provided in Rule 89(5) are beyond the extent of Section 54, which does not limit the refund of only inputs. Section 54(3) covers the refund of the credit of tax on both goods and services.

It means that now a taxpayer operating in an inverted tax structure environment can get a higher refund of unutilised ITC. It would be a significant relief for industries functioning under this tax set up. These include textiles, railway locomotives & parts, handlooms, solar modules, e-commerce, steel utensils, mobiles, etc.

Section 54(3) of CGST Act allows refund of any unutilised input tax credit at the end of any tax period due to inverted tax structure. Here, there is no specific mention of goods (inputs) or services (input services) alone. Hence, it can be concluded that the provision covers both services and goods. 

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On the other hand, Rule 89(5) of the CGST Rules defines a formula for calculating the amount of ITC refund due to the inverted tax structure. The maximum refund amount is equal to {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover } – tax payable on such inverted rated supply of goods and services.

However, the net ITC in this formula is defined as input tax credit availed on inputs during the relevant tax period. It does not see a mention of input services. But on observing the rest of the components of the above formula, turnover and output tax refer to services as well.

Even though the rule does not technically cover input services in the formula, the provision of the act overrides the rule to cover services. Hence, the High Court maintained that input services should also be eligible for ITC refund due to the inverted tax structure.

Questions may be raised about the applicability of judgement on various taxpayers. The decision can take a retrospective effect since it is a question of law. Further, the judgement can be held as a valid application by taxpayers outside the jurisdiction of Gujarat unless a contradictory verdict is given by the jurisdictional High Court of the taxpayer. 

In applying the judgement retrospectively, many taxpayers would have already added the ITC on input services to the cost or capitalised it. It may hugely impact the working capital of such companies. It is to be seen how the GST authorities counter the issue as the matter may be taken to the Supreme Court.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in