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Union of India v. VKC Footsteps India Pvt. Ltd.

Civil Appeal · 2021 INSC 469Decided 13 Sept 2021
Civil Appeal No. 4810 of 2021
Dr. Justice D.Y. Chandrachud · Justice M.R. Shah

Background

Under GST law, a business that buys inputs taxed at a higher rate than the rate charged on its own output ("inverted duty structure") can end up with unutilised input tax credit (ITC) sitting unused. Section 54(3) of the CGST Act allows refund of this accumulated credit, but Rule 89(5), framed to work out how much refund is due, defined "Net ITC" to cover only credit on input goods, excluding credit on input services, even though many businesses incur GST on services (like job-work, transport, etc.) as part of their inputs too. The Gujarat High Court had struck down this restrictive formula as going beyond what Section 54(3) allowed, while the Madras High Court had upheld it, creating conflicting rulings that both sides appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 54(3) itself only promises a refund "as may be prescribed," meaning Parliament deliberately left the government room to prescribe a formula: it does not guarantee refund of all unutilised ITC in every case of an inverted duty structure. Reading the statute's language and structure as a whole, the Court concluded that excluding input services from the refund formula was a valid policy choice within the rule-making power, not something that made Rule 89(5) illegal or unconstitutional; courts cannot rewrite a workable formula just because it produces some inequitable outcomes. It therefore upheld the Madras High Court's view and overturned the Gujarat High Court's view, dismissing the appeals of the businesses (assessees) and allowing the Union of India's appeals, while also formally urging the GST Council to reconsider and fix the anomaly as a matter of policy.

Lesson Learnt

Not every tax benefit a statute mentions is available without conditions, where a law says a refund will be given "as prescribed," the government's detailed rules fixing the formula will generally be upheld even if they produce an outcome some taxpayers see as unfair, unless the rule is shown to exceed what the law actually authorises.

Official source (sci.gov.in)View Judgment (PDF)

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