{"id":254248,"date":"2021-09-15T18:00:56","date_gmt":"2021-09-15T12:30:56","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=254248"},"modified":"2021-09-17T11:04:22","modified_gmt":"2021-09-17T05:34:22","slug":"parliament-entitled-to-make-policy-choices-on-fiscal-issuesheres-why-supreme-court-upheld-constitutionality-of-section-543-of-cgst-act","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2021\/09\/15\/parliament-entitled-to-make-policy-choices-on-fiscal-issuesheres-why-supreme-court-upheld-constitutionality-of-section-543-of-cgst-act\/","title":{"rendered":"‘Parliament entitled to make policy choices on fiscal issues’;Here’s why Supreme Court upheld constitutionality of Section 54(3) of CGST Act"},"content":{"rendered":"

Supreme Court<\/strong>: The division bench of Dr. DY Chandrachud and MR Shah, JJ has upheld the validity of Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) which provides for refund of unutilised input tax credit (ITC) in certain cases.<\/p>\n

Provisions in question<\/strong><\/span><\/h3>\n

Section 54[1]<\/a> of the CGST Act provides for a refund of tax. Under sub-Section (1) of Section 54, a person claiming a refund of \u201ctax and interest, if any, paid on such tax or any other amount paid\u201d has to make an application within two years of the relevant date.<\/p>\n

Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund was provided for in Section 54(3) which embodies for refund of unutilised input tax credit (ITC) in cases involving:<\/p>\n

(i) zero rated supplies made without payment of tax; and<\/p>\n

(ii) credit accumulation \u201con account of rate of tax on inputs being higher than rate of tax on output supplies\u201d.<\/p>\n

Further, the Central Goods and Service Tax Rules 2017 were formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in \u201ca case of refund on account of inverted duty structure\u201d. The said formula uses the term \u201cNet ITC\u201d. In defining the expression \u201cNet ITC\u201d, Rule 89(5)[2]<\/a> speaks of \u201cinput tax credit availed on inputs\u201d.<\/p>\n

Case Trajectory<\/strong><\/span><\/h3>\n

The petitioners approached the Gujarat High Court and the Madras High Court and made the following submissions:<\/p>\n

(i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure;<\/p>\n

(ii) ITC includes the credit of input tax charged on the supply of goods as well as services;<\/p>\n

(iii) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies;<\/p>\n

(iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and<\/p>\n

(v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.<\/p>\n

Gujarat High Court\u2019s judgment <\/em><\/strong><\/span><\/h4>\n

By its judgment dated 24 July 2020, the Division Bench of the Gujarat High Court, held that:<\/p>\n

\n

\u201cExplanation (a) to Rule 89(5) which denies the refund of \u201cunutilised input tax\u201d paid on \u201cinput services\u201d as part of \u201cinput tax credit\u201d accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.\u201d<\/p>\n<\/blockquote>\n

The High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of \u201cNet ITC\u201d for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3).<\/p>\n

Madras High Court\u2019s judgment<\/em><\/strong><\/span><\/h4>\n

The Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, and held;<\/p>\n

\n

\u00a0\u201c63\u2026<\/p>\n

(1) Section 54(3)(ii) does not infringe Article 14.<\/p>\n

(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.\u201d<\/p>\n<\/blockquote>\n

The divergent views by both the High Courts led to the case before the Supreme Court.<\/p>\n

Supreme Court\u2019s verdict <\/strong><\/span><\/h3>\n

Upholding the constitutional validity of Section 54(3), the Court held that<\/p>\n

\n

\u201cA claim to refund is governed by statute. There is no constitutional entitlement to seek a refund.\u201d<\/p>\n<\/blockquote>\n

The Court explained that Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii) i.e.<\/p>\n

(i) zero rated supplies made without payment of tax; and<\/p>\n

(ii) credit accumulation \u201con account of rate of tax on inputs being higher than rate of tax on output supplies.<\/p>\n

Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.<\/p>\n

\n

\u201cWhen there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive.\u201d<\/p>\n<\/blockquote>\n

Stating that courts are averse to entering the area of policy matters on fiscal issues, the Court said,<\/p>\n

\n

\u201cMany of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection.\u201d<\/p>\n<\/blockquote>\n

The Court also found it impossible to accept the premise that the guiding principles which impart a measure of flexibility to the legislature in designing appropriate classifications for the purpose of a fiscal regime should be confined only to the revenue harvesting measures of a statute.<\/p>\n

\n

\u201cThe precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals.\u201d<\/p>\n<\/blockquote>\n

Noticing that both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species, the Court said,<\/p>\n

\n

\u201cParliament engrafted a provision for refund Section 54(3). In enacting such a provision, Parliament is entitled to make policy choices and adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate.\u201d<\/p>\n<\/blockquote>\n

[Union of India v. VKC Footsteps, 2021 SCC OnLine SC 706<\/b><\/a>, decided on 13.09.2021]<\/p>\n

\n

*Judgment by: Justice Dr. DY Chandrachud<\/strong><\/p>\n

Know Thy Judge| Justice Dr. DY Chandrachud<\/a><\/p><\/blockquote>\n