2024 (11) TMI 39 - HC - GST

Educational institutions providing fully exempt services cannot claim Input Tax Credit refund under section 54(3) CGST Act

The Gujarat HC dismissed a petition challenging section 17(2) of the CGST Act as ultra vires Article 14. The petitioner, an educational institution ... Constitutional validity of section 17 (2) of the CGST Act - ultra vires Article 14 of the Constitution of India to the extent it restricts the refund under the inverted duty structure - vested right of the petitioner to claim refund of accumulated Input Tax Credit of goods and services on account of inverted duty structure under first proviso to section 54 (3) of the CGST Act - restrictions imposed on the petitioner on availment of credits used for exempted services under section 17 (2) of the CGST Act and claiming refund of taxes on inputs and input services under the first proviso to section 54 (3) of the CGST Act - right to avail Input Tax Credit - benefit of taxes paid on both inputs and input services - permission to apply for registration and file GST returns with effect from 1st July 2017 to avail Input Tax Credit - HELD THAT:- Sub-clause (ii) of sub-section (3) clearly stipulates that the refund of the input tax credit could not be payable even when the credit has accumulated on account of credit of tax or inputs being higher than the rate of tax on output supplies other than fully exempt supplies. Admittedly, the education service provided by the petitioner and other educational institution falls in category of fully exempt supply and therefore, the petitioner would not be entitled to the input tax credit. Sub-clause (ii) of section (3) applies to the inverted rate structure only whereas, in the zero rated supply, Nil Rated supply or exempted supply, the same would not be applicable as the very basis of inverted rate structure would not be applicable as the entire GST paid on the inputs would be liable to be refunded in such cases. The legislature has rightly provided that the tax credit which has accumulated on account of rate of tax on inputs being higher than the output tax would not cover the supplies having Nil rate or exempted supplies to entitle the service provider or the manufacturer to avail the refund of the input tax credit. When the provisions of Section 54 (3) of the GST Act provides for refund in terms of the first proviso to section 54 (3) categories which are governed by clauses (i) and (ii) and there is no constitutional entitlement to seek a refund as 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 where as under clause (ii) of the first proviso, refund of unutilized ITC is available where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies other than inputs utilised for output having Nil rate or exempted. Therefore, when there is neither a constitutional guarantee nor a statutory entitlement to refund, the claim of the petitioner to grant refund of ITC on output service exempt from tax cannot be accepted. Thus, no interference is called for by granting any relief as prayed for and the petition is accordingly dismissed. Issues Involved:1. Constitutionality of Section 17(2) of the CGST Act.2. Right to claim refund of accumulated Input Tax Credit (ITC) under the inverted duty structure.3. Restrictions on availment of credits for exempted services and refund of taxes on inputs and input services.4. Right to avail ITC as an indefeasible right under Article 300A of the Constitution.5. Eligibility for refund of taxes paid on both inputs and input services.6. Registration and filing of GST returns to avail ITC from a specified date.Detailed Analysis:1. Constitutionality of Section 17(2) of the CGST Act:The petitioner challenged the constitutionality of Section 17(2) of the CGST Act, arguing that it is ultra vires Article 14 of the Constitution as it restricts refunds under the inverted duty structure. The court referred to the Supreme Court's decision in Union of India vs. VKC Footsteps India Pvt. Ltd., which upheld the validity of the provisions, emphasizing that the legislature has the discretion to make policy choices and classifications in tax legislation. The court found no grounds to declare Section 17(2) unconstitutional, as the legislative policy and classification are within the permissible limits of Article 14.2. Right to Claim Refund of Accumulated ITC under the Inverted Duty Structure:The petitioner claimed a vested right to a refund of accumulated ITC due to the inverted duty structure. The court analyzed Section 54(3) of the CGST Act, which allows refunds in specific cases, such as zero-rated supplies or when the tax on inputs exceeds the tax on outputs, excluding fully exempt supplies. The court concluded that as the petitioner's services are fully exempt, they are not entitled to a refund under the inverted duty structure. The legislative intent was clear in restricting refunds for exempt supplies, aligning with the policy choices upheld by the Supreme Court.3. Restrictions on Availment of Credits for Exempted Services and Refund of Taxes on Inputs and Input Services:The petitioner sought to read down restrictions on availing credits for exempted services and claiming refunds on inputs and input services. The court reiterated that Section 54(3) does not provide for refunds in cases of exempt supplies, and the legislative classification is rational and based on economic and administrative considerations. The court upheld the restrictions, noting that the legislature's decision to exclude exempt supplies from refund eligibility is a valid policy choice.4. Right to Avail ITC as an Indefeasible Right under Article 300A of the Constitution:The petitioner argued that the right to avail ITC is an indefeasible right under Article 300A. The court clarified that there is no constitutional entitlement to a refund, as the right to claim ITC is governed by statutory provisions. The court emphasized that legislative discretion in tax matters includes determining the conditions for availing ITC and refunds, and Article 300A does not guarantee an absolute right to ITC.5. Eligibility for Refund of Taxes Paid on Both Inputs and Input Services:The petitioner contended that they should be eligible for refunds of taxes paid on both inputs and input services. The court referred to the Supreme Court's interpretation that refunds are limited to specific cases outlined in Section 54(3). The court affirmed that the petitioner's claim for a refund on exempt services does not align with the statutory framework, which does not extend refund benefits to exempt supplies.6. Registration and Filing of GST Returns to Avail ITC from a Specified Date:The petitioner sought permission to apply for registration and file GST returns retrospectively to avail ITC. The court found no provision in the CGST Act allowing retrospective registration for the purpose of claiming ITC. The legislative framework prescribes specific conditions for registration and filing returns, and the court did not find any basis to grant the retrospective relief sought by the petitioner.In conclusion, the court dismissed the petition, holding that the legislative provisions under the CGST Act are valid and the petitioner is not entitled to the reliefs sought. The court emphasized the legislature's discretion in tax policy and classification, which does not violate constitutional principles.