'Practical Effect Might Result In Certain Inequities': Supreme Court Points Out Anomalies In GST Refund Formula; Urges GST Council To Reconsider

The Supreme Court has asked the GST Council to take note of certain anomalies in the Refund Formula and reconsider it.

The bench of Justices DY Chandrachud and MR Shah observed that the practical effect of the formula might result in certain inequities.

The court said that, since the formula is not ambiguous in nature or unworkable and not opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation.

It was contended before the court that, where a registered person with a single product with an inverted duty structure is neither able to use the unutilized ITC for the payment of tax on output supply nor is allowed a refund. On the other hand, a registered person with products involving an inverted duty structure and otherwise, is in a position to utilise the ITC availed on input services for payment of tax on turnover not having an inverted rate structure.

It pointed out the following anomalies:

1. The formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services. While a similar formula is provided in Rule 89(4) with regard to zero rated supplies, in that case, the 'Net ITC' includes input goods and input services and thus, there is no imbalance between the different components of the formula.
2. The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods. This in our view is at odds with reality, where the ITC on both input goods and input services is accumulated in the electronic ledger and is then utilised for the payment of output tax. In making such an assumption, the formula tilts the balance in favour of the Revenue by reducing the refund granted.

The court said that, the proposed solution, that is prescribing an order of utilisation of the ITC accumulated on input services and input goods, may tilt the balance entirely in favour of the assessee as that would make a contrary assumption that the output tax is discharged by the ITC accumulated on account of input services entirely. Another possible solution could be that the Rule itself provides for a statutory assumption or a deeming fiction of utilisation of a certain percentage of ITC on input services towards the payment of output tax for the purpose of calculation of refund, the court said.

Anomaly per se cannot result in the invalidation of a fiscal rule 

"While we are alive to the anomalies of the formula, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation.....We are affirmatively of the view that this Court should not in the exercise of the power of judicial review allow itself to become a one-time arbiter of any and every anomaly of a fiscal regime despite its meeting the jurisdictional framework for the validity of the legislation, including delegated legislation.", the court said.

Practical effect of the formula might result in certain inequities

The court said that in the field of taxation, intervention of the court can read down or interpret a formula if the formula leads to absurd results or is unworkable.

"In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.", the bench said.

Also from the Judgment

Refund Cannot Be Claimed For Unutilised Input Tax Credit On Account Of Input Services: Supreme Court Upholds Validity Of Section 54(3) CGST Act

Case: Union of India vs. VKC Footsteps India Pvt Ltd. ; CA 4810 of 2021
Citation: LL 2021 SC 446
Coram: Justices DY Chandrachud and MR Shah

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