JUNE 18, 2018

By P G James

LATIN expression "in vivo" means an experiment or process performed on a living specimen. Just like that of living specimens, it has been the fate of the tax payers in GST to undergo the painstaking aftermath of the unintentional or intentional lapses or mistakes of the law framers or of the outage and erratic functioning of the GST portal.

Much publicized version of CBIC is that timely refund mechanism is essential in tax administration, as it facilitates trade through the release of blocked funds for working capital, expansion and modernization of existing business.

Sub section (3) of Sec 54 of CGST Act, 2017 provides for refund of input tax credit accumulated on account of inverted duty structure, i.e., rate of tax on input tax credit received is higher than the rate of tax of output supplies.

Rule 89 of CGST Rules, 2017 prescribes the modalities and formula for claiming the refund.

The relevant extract of the Rule is reproduced below:

Rule 89(5) of CGST, 2017:

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula -

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

Explanation.- For the purposes of this sub rule, the expressions "Net ITC" and "Adjusted Total turnover" shall have the same meanings as assigned to them in sub-rule (4).

(B) "Net ITC" means input tax credit availed on inputs and input services during the relevant period;

In the formula of Maximum Refund Amount, numerator comprises of the turnover of inverted rated supply of goods only and but not of services which is to be multiplied with Net Input Tax credit. Whereas the Net ITC is defined as the input tax credit availed on inputs and input services during the relevant period.

By excluding the turnover of supply of services having inverted tax, the hidden intention of the law makers, perhaps may be,not to give refund of input services even though inward and outward supplies consists both of goods and services.

Presumably to cure the apparent error, Not 21/2018-Central Tax, was issued on 18th April, 2018 terming it as CGST (Fourth Amendment) Rules, 2018 wherein "input services" was deleted from the definition of Net ITC, in Rule 89 as given below:

"(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.

Explanation:- For the purposes of this sub-rule, the expressions –

(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

In the denominator turnover of inverted supply of services is included and in the numerator tax payable on inverted supply of services is also included, but Net ITC remained only for inputs and not of input services.

Amendment is always prospective in operation, i.e., effective from 18th April 2018. It has been specifically mentioned in the Notification that "save as otherwise provided, they shall come into force on the date of their publication in the Official Gazette", but there was no specific saving clause.

GST Officials denied the refund insofar as it is related to input services from the effective date of the Notification, i.e., 18th April and fortunate are those who have got refund prior to this period.

But the fortune lasted only for two months - To the utter dismay and shock, another Notification No. 26/2018 – Central Tax was issued on 13th June 2018 as CGST (Fifth Amendment) Rules, 2018 substituting rule 89(5) retrospectively w.e.f 01.07.2017 and which actually is giving retrospective effect to the amendment of Not 21/2018-CT dated 18th April 2018.

Sooner, the process will start to recover the tax refund sanctioned in excess on account of either the factor of input services contained in the Net ITC prior to 18.04.18or the inclusion of turnover and tax on inverted supply of services in the formula. In few cases, additional refund may accrue on account of the inclusion of turnover of inverted supply of services.

It is a double whammy which add to the woes of the refund seekers insofar as the amendment is made with retrospective effect from 1st July, 17 to deny the ITC on input services and to recover the excess refund sanctioned on account of deletion of input services from Net ITC and addition of turnover of inverted supply of services and tax paid on such services.

Nothing stings more deeply than the loss of money especially when it is due to a retrospective legislative measure.

The following legal maxims are pertinent in this regard:

"Nova constitution futuris formam imponere debet non praeteritis" - A new law ought to regulate what is to follow, not the past

"lex prospicit non respicit " - Law looks forward not backward.

"Quicquid recipitur, recipitur secundum modum recipientis" -Whatever is received, is received according to the intention or manner of the party receiving.

Uniformity in tax administration is said to be even more important than legal correctness.

"Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset" - Apex Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Pvt Ltd - 2014-TIOL-78-SC-IT-CB and relied upon in UOI vs Intercontinental Consultants & Technocrats P Ltd - 2018-TIOL-76-SC-ST.

As held in Kinetic Engineering Ltd case, certainty in taxation is a fundamental canon of taxation, and if that is not followed, there will be confusion/chaos in tax administration - 2012-TIOL-508-CESTAT-MUM).

In the present GST scenario, one is constrained to opt for either one of the prayers:

"Oh Lord,forgive them, for they don't know what they are doing"

"Oh Lord, do not forgive them, for they do know, what they are doing"

(The views expressed are strictly personal.)