The Supreme Court has upheld the Madras High Court order of restricting input tax refunds for services used by industries facing inverted duty structure under the goods and services tax (GST) regime. The order may affect cash flow of pharma, fertiliser, footwear and textile industries.
In this connection, the apex court quashed the Gujarat high court judgement.
The two lower courts had earlier given contradictory judgements.
While the Madras high court had upheld the Rule 89 (5) inserted by the government under the CGST Act on restricting such input tax refunds as valid. It was contrary to Gujarat high court order which had struck down the rule.
Inverted duty structure means that companies face higher GST rates on raw materials than on finished goods. While the GST Council has addressed the issue of inverted duty structure for many industries including telecom, it still persists for textiles, footwear, pharma and fertilizer industries.
The government had brought in the rule in 2018 by amending an earlier one that allowed all kinds of credits, regardless of whether the taxes were paid on goods or on services.
While finding anomalies in a formula for computing input tax refunds given in the rule, the supreme court refrained from reading it down but asked the GST Council to reconsider it, pointed out Abhishek Jain, tax partner EY.
"The industry players would hope that the government would reconsider the anomalies and recraft the formula in a better manner," he said.
Jain said the apex court has removed the doubts that arose after the contradictory views by the high courts of Madras and Gujarat. Parag Mehta, partner, NA Shah Associates, however, said with the supreme court judgement, the impacted industries will have a scenario with substantial amounts blocked in input tax and no possibility of refund leading to working capital issues.