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The Interest Conundrum

SEPTEMBER 23, 2020

By Vijay Kumar

THE Board appears to have issued instructions in Letter F.No. CBEC-20/01/08/2019-GST dated 18.09.2020, to the effect that:

In order to implement the decision of the Council in its true spirit, and at the same time working within the present legal framework, it has been decided to address the issue through administrative arrangements, as under:

a. For the period 01.07.2017 to 31.08.2020, field formations in your jurisdiction may be instructed to recover interest only on the net cash tax liability (i.e. that portion of the tax that has been paid by debiting the electronic cash ledger or is payable through cash ledger); and

b. wherever SCNs have been issued on gross tax payable, the same may be kept in Call Book till the retrospective amendment in section 50 of the CGST Act is carried out.

The Board letter, while being loudly visible all over the web, is not found in the government portals or even in their tweets. Some say, it is only instructions only to their staff and not meant for public consumption, digestion or diagnosis. But it is meant for the public and the public has a right to be ignorant and it is the duty of the government to keep the public as ignorant as possible. The government is simply upholding the right of the public to not know. People will be worried if they have too much information and in these bad times, it is better to keep them as uninformed as possible.

Because of a simple mess-up at the drafting stage, we are stuck with clarifications, litigation, amendment (even the retrospective one). I am sure there will be another mess with the proposed retrospective amendment. Actually, they need not do it. This instruction is good enough or they can give a clarification that the amendment is retrospective, but Parliament is readily available for the babus - let them do all their amendments.

In any case, they cannot keep this instruction under wrap for long as the Master Circular No. 1053/02/2017-CX dt. 10.03.2017 issued by the Board stipulates that a formal communication should be issued to the noticee, where the case has been transferred to the call book. So, they have to tell the taxpayer that his notice is being consigned to the call book with no likelihood of a recall in the foreseeable future.

The instruction speaks about situations where notices are issued. But what about cases where bank accounts have been attached and writ petitions are pending in various High Courts. What can't the Board instruct that the bank attachments should be unconditionally lifted?

For more on this, please see:

1. Section 50 Notification Causes Widespread Fear

2. Unjust Interest Virus Contained

3. Not a Penny More

4. Interest imbroglio u/s 50 - Board's rescue act

The Refund conundrum - VKC Footsteps not good to follow:

Two days ago, the Madras High Court delivered a landmark judgement, uprooting a landmark judgement of the Gujarat High Court. Many of the lawyers and taxpayers had much to celebrate the judgement of the Gujarat High Court in the VKC FOOTSTEPS INDIA case. We even had a webinar with some top lawyers of the country on the subject. The joy is short-lived, for the Madras High Court held that Gujarat High Court is not right - 2020-TIOL-1599-HC-MAD-GST.

Now, we have a situation whereby, taxpayers in Gujarat are eligible for refund of the unutilised credit of inputs and input services, while those in Tamil Nadu are eligible only for the refund of credit of inputs and not input services. What about the taxpayers in other States? Uncertain, with a capital U. The High Courts in those States will follow either Gujarat or Madras, on their own reasons. [While I was arguing a case in the Andhra Pradesh High Court, the judge asked several questions (actually to the Government Counsel). I cited a Gujarat High Court judgement which answered all his questions. He then said, "the Gujarat High Court has gone by logic, I will go by law…", and as I stood in stunned silence, he pronounced the order in my favour.]

Identical issue is pending in other High Courts also and we will know soon whether the one nation one tax is uniformly applicable in all the States. Obviously, the matter has to be finally decided by the Supreme Court. But if the Government is interested in avoiding litigation and showing a little concern for the taxpayers, this small refund can be allowed - after all it's not a huge burden on the government, but is a backbreaking load on each affected taxpayer.

The Two Judgments - a fleeting comparison.

Gujarat		Madras
Refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied. The Petitioners have therefore challenged validity of amended Rule 89(5) of the CGST Rule, 2017 to the extent it denies refund of input tax credit relatable to input services. It is not the case of the Revenue that credit for the tax paid on input services is not available to petitioner. They are only denying refund in cash of unutilized amount of input service credit. They are willing to grant refund in cash of unutilized amount to the extent relatable in inputs only.		The case of the Petitioners is that they are entitled to a refund of the entire unutilised input tax credit, irrespective of whether such credit accumulated on account of procurement of input goods and/or input services by paying tax at a higher rate than that paid on output supplies. Revenue believes that refund of unutilised input tax credit is permissible only in respect of the input goods and that credit accumulation on account of procuring input services is liable to be disregarded for refund purposes.
Decision
It appears that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGGST Rules, 2017 to exclude refund of tax paid on "input service" as part of the refund of unutilised input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act,2017 which provides for claim of refund of "any unutilised input tax credit". The word "Input tax credit" is defined in Section 2(63) means the credit of input tax. The word "input tax" is defined in Section 2(62), whereas the word "input" is defined in Section 2(59) means any goods other than capital goods and "input service" as per Section 2(60) means any service used or intended to be used by a supplier. Whereas "input tax" as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus "input" and "input service" are both part of the "input tax" and "input tax credit". Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act, 2017, the legislature has provided that registered person may claim refund of "any unutilised input tax", therefore, by way of Rule 89(5)of the CGST Rules, 2017, such claim of the refund cannot be restricted only to "input" excluding the "input services" from the purview of "Input tax credit". Moreover, clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules 2017. The intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No. 79/53/2018-GST dated 31.12.2018 to deny the registered person refund of tax paid on "input services' as part of refund of unutilised input tax credit. Explanation (a) to Rule 89(5) which denies the refund of "unutilised input tax" paid on "input services" as part of "input tax credit" accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017. Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines "Net Input Tax Credit' means "input tax credit" only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean "input tax credit" availed on "inputs" and "input services" as defined under the Act. The respondents are therefore, directed to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of "input services" as part of the "net input tax credit" (Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules, 2017 for claiming refund under Sub-section 3 of Section 54 CGST Act, 2017.		The proviso to Section 54(3) of the CGST Act and, more significantly, its import and implications do not appear to have been taken into consideration in *VKC Footsteps* except for the brief reference in paragraph 23. Section 54(3)(ii) qualifies the enacting clause by also limiting the source/type and, consequently, quantity of unutilised input tax credit in respect of which refund is permissible. Rule 89(5) of the CGST Rules, as amended, is intra vires both the general rule making power and Section 54(3) of the CGST Act. There is no dispute as regards the power to amend with retrospective effect either as such power is conferred under Section 164 of the CGST Act, albeit subject to the limitation that it cannot pre-date the date of entry into force of the CGST Act. we are unable to subscribe to the conclusions in *VKC Footsteps. In our view, the Gujarat High Court failed to take into consideration the scope, function and impact of the proviso to Section 54(3). we are unable to countenance the submission that the word ''inputs'' should be read so as to include ''input services'' merely because the undefined word ''output supplies'' is used in Section 54(3)(ii). Hence, we conclude that both the statutory definition and the context point in the same direction, namely, that the word "inputs" encompasses all input goods, other than capital goods and excludes input services. CONCLUSIONS* (1) Section 54(3)(ii) does not infringe Article 14. (2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power. (3) Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii). (4) Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof. (5) As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.