The provisions pertaining to refund of ITC are contained in Section 154 of the CGST Act whereby refund of ITC has been restricted to certain circumstances. To be specific, the refund of ITC has been allowed in case of exports made under LUT or in situations of Inverted tax rate structure.
For the sake of discussion, emphasis is placed on the refund provisions explicitly providing for refund of ITC where ITC has been accumulated due to inverted tax rate structure i.e. on account of GST rate on inputs supplies being higher in comparison to GST rate on outward supplies. The relevant provisions reads as –
Section 54(3)(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.”
No dual interpretation can be drawn based on the wordings of Section 54(3)(ii). In the light of the fact that the aforementioned section happens to be unambiguous and explicit in so far as its intention is concerned with respect to granting of refund under inverted tax rate structure, issue of any orders, instructions or directions by the CBIC in pursuance of powers conferred under Section 168(1) of the CGST Act, seems unnecessary.
Section 168(1) focuses on ensuring proper implementation of the provisions of the CGST Act by the officers by emphasis being placed on uniformity in the implementation of the provisions. The aforementioned section goes as “The Board may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions”.
Nevertheless, the CBIC issued a clarificatory circular, thereby invoking the power conferred under Section 168(1), pertaining to unavailability of refund of ITC when the tax rate on input supplies is higher than the tax rate on outward supplies but the input-output happen to be the same. Circular No.135/05/2020-GST dated 31.03.2020 reads as-
“It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that the input and output being the same in such cases, though attracting different tax rates at different points in time do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act, it is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.”
From the wordings of the above circular, it is apparent that a further restriction has been imposed on refund of ITC under inverted tax rate structure. However, in the case of BMG INFORMATICS PVT. LTD., VERSUS THE UNION OF INDIA AND 3 ORS, the validity of the above circular has been questioned on the cojoint reading of Section 54 and Section 168(1) of the CGST Act. In the given case, the Gauhati HC held that the power under Section 168(1) can be invoked only for the purpose of clarification in relation to the provisions of the CGST Act in order to ensure proper implementation of the relevant provisions. This implies that the issue of the instructions, directions or orders should be such that the same should not be in conflict or contradictory to provisions of the Act itself. If the directions issued happen to alter any of the provisions of the CGST Act then the same is invalid since Section 168(1) nowhere grants the power to modify the provisions of the GST Law.
The Gauhati HC drew a comparison between the Circular issued and Section 54(3)(ii) of the CGST Act and concluded that the circular issued is not in accordance with the provisions contained in Section 168(1) since it is altering Section 54(3)(ii). Section 54(3)(ii) explicitly provides for refund of ITC where tax rate on inputs is higher in relation to that on the outward supplies (except for the situations where the outward supplies are exempted/nil rated). However, the aforementioned circular disallows such refund where the input and output are the same even if the tax rates are different at different point of time.
Hence, the HC opined that the circular is contradictory to the CGST provisions and hence, it needs to be ignored.
