GST UPDATE NO. 150/2019-20 Input tax credit accumulated up to July 31, 2018 will not lapse

Honorable Gujarat High Court in a landmark judgment of Shabnam Petrofills Pvt Ltd which will benefit entire Textile Weaving Industry of India has struck down the second clause of Notification No 20/2018 due to which now the Weavers Are Not Required To Lapse ITC.
This can be seen as a major relief for the textile sector, the Gujarat High Court has made it clear that input tax credit accumulated up to July 31, 2018 will not lapse. This will facilitate refund of the credit for that period and thus end the working capital woes for fabric manufacturers.

The core of the issue is the inverted duty structure which results in a situation when there is a higher duty on raw material/input and higher duty on finished product. In such a situation, technically speaking, refund is to be provided. In case of the textile sector, man-made fabric attracts GST at the rate of 5 per cent while inputs for that attract levy at the rate of 12 per cent.

As power loom and man-made fabric manufacturers were facing problems, CBIC issued a circular saying that refund will be possible from August 2018 but accumulated ITC till July 2018 will lapse. Aggrieved by this, various companies and association of fabric weavers (power looms) filed petitions in the Gujarat High Court.

Strong reliance has been placed upon by the appellants on the decision of the Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karnataka Ltd, 1999 (112) E.L.T. 353 (S.C.), wherein it is held that when credit has been validly taken, its benefit is available to the manufacturer without any limitation in time. The credit is indefeasible.

Reliance is also placed upon the decision of the Supreme Court in the case of Eicher Motors Ltd. v. Union of India, 1999 (106) E.L.T. 3(S.C.), for the proposition that a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility thereto gets worked out or until those goods existed.
Further reliance is placed on the decision of this Court in the case of Baroda Rayon Corporation Limited – 2014 (306) E.L.T. 551 (Guj.).

The impugned Notification dated July 26, 2018 bearing No.20/2018 and Circular dated August 24, 2018 bearing Circular No.56/30/2018-GST to the extent it provides that the input tax credit lying unutilized in balance, after payment of tax for and up to the month of July 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse, are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of section 54(3)(ii) of the CGST Act, as section 54(3)(ii) of the CGST Act does not empower to issue such notifications and consequently, it is held that the petitioners and members of the petitioners are entitled for the credit and it be granted to them.

It is a well settled principle that the delegated legislation has to be in conformity with the provisions of the parent statute. By prescribing for lapsing of ITC, the Notification No. 05/2017-C.T. (Rate) dated 28.06.2017, as amended by Notification No.20/2018-C.T. (Rate) dated 07.2018, has exceeded the power delegated under Section 54(3) (ii) of the CGST Act

Earlier, the Revenue Department argued that GST reduction on manmade fiber yarn to 12 from 18 per cent gave significant relief to the sector and reduced the accumulation of ITC. As there were requests for relaxing conditions related with refund of accumulated credit, the GST Council agreed to remove the condition, however with the prospective effect.

The Council then decided that the input tax credit lying in balance on the date of the notification implementing the new provision will lapse. This lapse of accumulated ITC was in the spirit of earlier rate structure which envisaged that refund of accumulated credit was not to be allowed and accordingly circular was issued.

However, the Court did not agree with the contentions and said that no inherent power can be inferred from the provision of GST Law empowering the Centre to provide for the lapsing of the unutilized ITC accumulated on account of inverted rate structures. The petitioners have a vested right to unutilized ITC accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies.
The readers of our update will be remembering that we have already opined in our update at the time of this notification that credit earned cannot be lapsed. We have already fight this matter for textile processor in Excise regime when compounded levy was introduced and successfully won the case in case of Shankeshwar Fabrics. Following the same analogy, this notification has also been quashed. But the department is still asking for reversal and issuing show cause notice in case refund is claimed by textile processors without reversal. The authors of this update have come across such letters from the department. But High Court decision (Even of other state, when there is contradictory verdict of any other High Court is not available) is binding on all lower formation of department and they cannot take stand against the same.

This is solely for the educational purpose.

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GST UPDATE NO. 150/2019-20 Input tax credit accumulated up to July 31, 2018 will not lapse

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