Businesses such as e-commerce, which face higher goods and services tax (GST) on raw materials than on finished goods, are now in a quandary over whether or not they will get refunds on taxes paid on services.
Contrary to an earlier Gujarat verdict, the Madras high court has held rule 89(5) inserted by the government under the CGST Act on restricting such input tax refunds as valid.
This means that companies facing inverted duty structure raw materials drawing higher GST rates than finished goods won’t be able to get refunds of tax credits for the service inputs they used, but will get it for merchandise inputs.
The government had brought in the rule in 2018 by amending an earlier one that allowed all kinds of credits, regardless of whether the taxes were paid on goods or on services.
Delivering a verdict on a batch of petitions filed on the issue, the Madras High court upheld the validity of the rule as well as the main section of the GST Act.
The department of revenue argued that goods and services form distinct class and legislature has wide latitude in matters of taxation in terms of granting of refunds and can pick and choose whom they can or cannot grant refund On the other hand, petitioners argued that the main section and the rule create a distinction between two categories of assessees.
Earlier, the Gujarat High Court had allowed a footwear company to claim credit for taxes paid on service inputs under the GST regime. The court had struck down an explanation given under Rule 89(5) under the CGST Act.
The court, while hearing a petition filed by VKC Footsteps India, had said that the intent of the government by framing a rule restricting input tax credit cannot be the intent of law. Footwear attracts GST at the rate of 5 percent whereas majority of the inputs and input services attract GST at the rate of 12% or 18%, which results in accumulation of unutilised credit.
Hence refunds of this credit become critical for this business. With two opposite rulings by high courts, the matter gets complicated. While the rulings by the two high courts will run in their separate states, what will happen to those running their businesses in other states? Now either the higher benches of high courts or the Supreme Court will have to settle the matter. Both the Gujarat and Madras high court rulings were given by two-member bench each.