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19 August 2019

Accumulated ITC on account of inverted rate structure lying as on 31 July 2018 will not lapse

Recently on 17 July 2019 in a matter of Shabnam Petrofils (P.) Ltd. vs. Union of India reported at (2019) 108 taxmann.com 15 (Gujarat), Hon'ble High Court of Gujarat at Ahmedabad has struck down the second proviso of the opening paragraph of Notification no. 05/2017 - C.T. (Rate) dated 28 June 2017, inserted vide Notification no. 20/2018 - C.T. (Rate) dated 27 July 2018 as issued without authority of law.

Section 54(3)(ii) of CGST Act, 2017 provides that refund of unutilized input tax credit shall be allowed where such credit has been accumulated on account of inverted rate structure, i.e. when inputs are purchased at a higher rate of GST than the GST chargeable on outward supplies. Section 54(3)(ii) ibid. provides power to the Government to notify certain goods on which such refund shall not be granted in pursuance of which Notification no. 05/2017 - C.T. (Rate) dated 28 June 2017 was issued notifying certain commodities.

Now representations were received from the industry regarding difficulties being faced as refund was not allowed to them for inverted rate structure. Consequent to this, a Notification no. 20/2018 - C.T. (Rate) dated 27 July 2018 was issued providing prospective relief on certain commodities for which refund on account of inverted rate structure shall be allowed from 01 August 2018. However, as per second proviso, with respect to the unutilized ITC (because of inverted rate structure) lying in their account as on 31 July 2018, it was provided that the same shall lapse.

Hon'ble Gujarat High Court while striking down the second proviso (lapse of utilized credit) introduced vide Notification no. 20/2018 - C.T. (Rate) and holding it as ultra-vires to Section 54(3)(ii) observed that no inherent power can be inferred from Section 54(3)(ii) to issue notification providing for lapsing of credit as such Section nowhere expressly provides that. Further, Section 17(4) and 18(4) of CGST Act specifically provides for lapsing of credit and thus, where legislature wanted the ITC to lapse, it would have been provided in the Act itself.

Resultantly, all those assessees dealing in products which are covered under Notification no. 20/2018 - C.T. (Rate) dated 27 July 2018 will be entitled for unutilized accumulated credit in their account as on 31 July 2018 and the same shall not lapse. With respect to the credit accumulated under inverted rate structure after 31 July 2018, assessees will be entitled for refund of the same under Section 54(3)(ii) ibid.