The landmark tax reform of Goods and Services Tax (GST) as introduced from 1st July, 2017, is nearing completion of 5 months. The GST Council has conducted 23 meetings with continuous effort of making GST robust. Nevertheless, there are certain issues which have not been resolved so far. One such issue pertains to the refund of GST paid on input services accumulated on account of inverted duty / tax structure.
Section 54(3) of the Central Goods and Services Tax Act, 2017 (‘the CGST Act’), provides that refund of any unutilised input tax credit (ITC) may be claimed in case of (i) zero rated supplies made without payment of tax or (ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies). Such refund of accumulated input tax credit may be claimed by an assessee at the end of any tax period.
The words “inputs” and “output supplies” used in Section 54(3) of the CGST Act need attention. The term input has been defined as: “goods other than capital goods used or intended to be used by a supplier in course or furtherance of business” and the term “output supply” has not been defined. However, the term “outward supply” has been defined to mean “supply of goods or services or both, whether by sale…... made or agreed to be made by such person in the course or furtherance of business.”
What does output supply mean? Does output supply mean supply of goods and services both and is required to be read analogous to outward supply defined in the Act or it means output supply of only goods? Assuming output supply is to be read analogous to outward supply, another question arises is that does Section 54(3) of the CGST Act allows refund of only inverted rated input goods used in supplying output goods or services or both? Therefore, does the provision intend not to allow refund arising out of inverted rated structure of input services?
Let us have a look at the Central Goods and Services Tax Rules, 2017 (the Rules) and see if we can find an answer to the above question. Rule 89 of the Rules provides for the procedure for claiming refund. Rule 89(5) provides for the formula for calculating the refund amount because of inverted duty / tax structure as under: -
Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods
“Net ITC” means input tax credit availed on inputs and input services during the relevant period;
“Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;
“Relevant period” means the period for which the claim has been filed.
The formula provided in this rule pertains to maximum refund amount allowed in case of inverted duty / tax structure. The numerator comprises of “turnover of inverted rated supply of goods” and the turnover of inverted rated supply of goods is to be multiplied with “Net ITC”. Net ITC is input tax credit availed on inputs and input services during the period for which refund claim has been made.
Thus, the rule and formula provided above adds to the confusion arising from the relevant statutory provision as the numerator comprises of both turnover of inverted rated supply of goods and input tax credit availed on inputs and input services both during the period for which refund claim has been made.
Can it be said that irrespective of the term “Net ITC” the intention of the law makers is to allow refund of input goods and not input services while the output/outward supply pertains to both goods and services? If so, an assessee providing outward supply may be using various input goods and input services, but refund of inverted rated structure of only input goods is allowed as per law and not of input services. If this interpretation is adopted, the service sector industries may be adversely affected, particularly when multiple rates for services have been prescribed with or without conditions as to availment of credit.
To add to this complexity, a question also arises as to how should the term “inputs” used in Section 54(3) of the Act be construed as several goods may be used in supplying final product/output? There can be two points:
(i) Input needs to be understood as only those inputs on which rate of tax is higher than the rate of final product/output i.e. an assessee needs to make one to one correlation of rate on tax on input and final product/output and claim refund of only those inputs, the rate of tax on which is higher than final product/output;
(ii) Alternatively, a taxpayer can claim refund in respect of principal input goods used in supplying final product/output in which case interpretation of ‘principal input’ will also be a question.
Thus, the provision in the CGST Act when analysed along with the relevant rule does not clarify the question, but only adds to the complexities. It appears representations have also been made by various industries seeking clarification on some of these issues, but they remain unresolved. It is high time that clarification is issued in this regard or amendment to the provisions of law is made at the earliest.
[The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi]