Goods & Services Tax (GST) in IndiaValidity of Circular restricting the scope of Inverted Duty Structure

INTRODUCTION

Recently, the Central Board of Indirect Taxes & Customs (‘CBIC’), vide Circular No. 135/2020-GST dated 31.03.2020, clarified that the taxpayers cannot claim refund in terms of clause (ii) of Section 54(3) of the CGST Act, 2017, in cases wherein the input and output supplies remain the same, though attracting different tax rates at different point in time.

Applicability – Where the input and output supplies are same.

Example – There was a change in tax rate on cut and polished diamonds w.e.f. 25^th January 2018. The tax rate was reduced from 3% to 0.25%. The input as on 25^th January 2018 was purchased at the rate of 3% and sold at the rate of 0.25%.

Effect of the Circular – The taxpayer/ traders who purchased inputs at higher rate of tax and sold them at lower rate of tax will not be eligible to claim refund under Section 54(3)(ii) of the CGST Act, 2017.

This clarification by the CBIC has restricted the scope of Section 54(3)(ii) of the CGST Act, 2017. Can this clarification be made binding on the taxpayers or will it lead to another round of dispute / litigation in the GST arena.

SECTION 54(3)(ii) OF THE CGST ACT, 2017

Section 54(3) of the CGST Act, 2017 reads as under:

“Section 54(3) – Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period :

Provided that no refund of unutilised input tax credit shall be allowed in cases other than —

(i) zero rated supplies made without payment of tax;

(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), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty :

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

Section 54(3) of the CGST Act, 2017 allows the taxpayers to claim refund of unutilized Input Tax Credit (“ITC”). However, the refund of unutilized ITC can be claimed by the taxpayer under two scenarios:

1. when accumulation of ITC is on account of zero-rated supplies made without payment of taxes;

2. when accumulation of ITC is due to Inverted Duty Structure i.e., where tax rate on input is being higher than the tax rate on output supplies.

Clause (ii) of Section 54(3) has two limbs:

First, the taxpayer who has accumulation of ITC due to less tax rate on output supply than the tax rate on input, then such taxpayer can claim refund of the accumulated ITC. The first limb only provides that whenever the ITC is accumulated due to tax rate on input being higher than the tax rate on outputs, the taxpayer can claim refund of such accumulated ITC. There is no restriction in the first limb.

Second, it empowers the Central Government to notify goods or services, supply of which will not be covered under Section 54(3)(ii) of the CGST Act, 2017. Under the second limb, the Central Government has been empowered to notify any goods or services on supply of which the provisions of Section 54(3)(ii) of the CGST Act, 2017 will not be applicable. The Central Government has exercised its power in the past and issued various notification restricting applicability of Section 54(3)(ii) of the CGST Act, 2017 on supply of certain goods and services.

JUDICIAL PRECEDENTS

1. Circulars are not binding on the taxpayer

It has been a well settled law that the circulars issued by the CBIC or Revenue Department are not binding on the assessees/ taxpayers. The Hon’ble Supreme Court in the case of Commissioner v. Minwool Rock Fibres Ltd. — 2012 (278) E.L.T. 581 (S.C.) held as under:

“14. …In our view, the departmental circulars are not binding on assesee or quasi judicial authorities or courts and therefore, in that view of the matter, the circular/instructions issued by the Board, would not assist them.”

2. Circulars cannot be contrary to Law

The circulars are issued to clarify the ambiguities in law and provide assistance in the administration of law. However, the circulars cannot be used to override the statutory provisions nor can they be contrary to law. The Hon’ble Supreme Court in the case of Commissioner v. Ratan Melting and Wire Industries — 2008 (12) S.T.R. 416 (S.C.) held that a Circular contrary to the statutory provisions has no existence under law.

3. Administrative authorities cannot give their own interpretation to the statutory provision

Under the guise of circular, the administrative authorities cannot give their own interpretation to the statutory provisions. The Hon’ble Supreme Court in the case of CTO vs. M/s Bombay Machinery Store (Civil Appeal Nos. 2217 of 2011 order dated 11^th April 2020) held as under:

“17. …. …. In the event, the authorities felt any assessee or dealer was taking unintended benefit under the aforesaid provisions of the 1956 Act, then the proper course would be legislative amendment. The Tax Administration Authorities cannot give their own interpretation to legislative provisions on the basis of their own perception of trade practise. This administrative exercise, in effect, would result in supplying words to legislative provisions, as if to cure omissions of the legislature.”

4. Circular cannot impose condition not existing in law

The circular cannot impose a condition or restriction which is not existing under law. The Hon’ble High Court of Bombay in the case of Alfa Laval (India) Ltd. v. Union of India – 2014 (309) E.L.T. 17 (Bom.) struck down a circular which imposed restriction/ limitation which were not existing under the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 and had effect of whittling down the Rules .

CONCLUSION

The Circular No. 35/2020-GST dated 31.03.2020 has in effect restricted the provision of Section 54(3)(ii) of the CGST Act, 2017. The CBIC has given its own interpretation to the provision providing for refund of accumulated ITC in case of Inverted Duty Structure. The Circular further seems to be in contradiction to the provisions of the CGST Act, 2017 and if taken for judicial review, the Courts may deem fit to stuck it down considering the judicial precedents on similar issue.

Alternatively, the Central Government ought to have issued notification under Section 54(3)(ii) of the CGST Act, 2017 restricting the applicability of Section 54(3)(ii) on supply of such goods and services, on which the Central Government has reduced the tax rates.

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