Karnataka HC quashes amendment to Rule 89(4)(C) which restricts refund of unutilized ITC under GST

This Tax Alert summarizes a recent ruling of Karnataka High Court (HC) on the validity of the amendment carried out in Rule 89(4)(C) of Central Goods and Services Tax Rules, 2017 (CGST Rules).

The amendment restricted the “turnover of zero-rated supply of goods” to 1.5 times the value of like goods domestically supplied by same or similarly placed supplier, for the purpose of computing refund of ITC.

The key observations of the HC are:

• The intention of zero-rating is to make entire supply chain of exports tax free. Accordingly, Section 16(3) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) allows refund of input tax paid in the course of making zero-rated supplies. The Rule in whittling down such refund is ultra vires in view of the well settled principle of law that Rules cannot override the parent legislation.
  
  
• The amended Rule is violative of Article 14 and Article 19(1)(g) of the Constitution of India as the restriction is only provided in case of refunds of zero-rated supply of goods without payment of tax. There is no such restriction on exporting goods with payment of tax. This results into hostile discrimination between two classes of persons.
  
  
• The terminologies used in the impugned Rule “like goods” and “same or similarly placed supplier” does not have any precise meaning in the said Rules and no guidelines is present in that respect.
  
  
• The impugned amendment is arbitrary and unreasonable as it bears no rational nexus with the objective sought to be achieved by Section 16 of the IGST Act.
  

Basis above, HC held that the amendment carried out in Rule 89(4)(C) is ultra vires the GST law and the Constitution of India and consequently, deserves to be quashed.

Comments

• This is a welcome ruling for the exporters claiming refund of unutilized ITC w.r.t. export of goods.
  
  
• HC has reiterated that the objective of the Government is not to tax exports in any manner and hence, entire supply chain of exports should be tax free.
  
  
• Taxpayers whose refund claims were rejected in the past or claimed lower refund in accordance with the impugned Rule may evaluate the possibility and mechanism to claim the differential refund.
  
  
• There is yet another disparity in tax implication concerning export of goods made with and without payment of tax. For the purpose of refund of unutilized ITC, the value of goods exported is the least of FOB value or the value declared on invoice, as against invoice value in case where export is made with payment of tax.