Gujarat HC allows tax credit on services under GST, signalling help to cos.

The Gujarat High Court has allowed a footwear company to claim credit for taxes paid on service inputs under the Goods and Services Tax (GST) system, likely signaling relief for e-commerce majors including Amazon, Flipkart, and Urban Company.

The court dismissed a clarification provided under Rule 89(5) of the Central GST Act, which was used by the government to refuse claims for an input tax credit to services in the event of an inverted duty structure. The structure means higher taxes are levied on raw materials than on final products.

In 2018, the government implemented the law by amending one that permitted all kinds of credits, whether taxes are paid on goods or services. As such, the new law and the Act are inconsistent, the high court said.

While hearing a petition lodged by VKC Footsteps India, the court said the government’s intent to frame a regulation that limits input tax credit could not be the intent of the law.

Footwear attracts GST at a rate of 5%, while most products and input services attract GST at a rate of 12% or 18%, which results in the accumulation of unused credit, said Harpreet Singh, KPMG ‘s partner.

The decision would undoubtedly set a precedent for courts and tribunals considering similar cases. For example, Maharashtra’s advance ruling authority held that Daewoo-TPL JV, engaged in the execution of large-scale project construction, was unable to reimburse ITC on ‘input services’ for transactions covered by inverted duty structure.

Experts said Gujarat ‘s high court ruling may help many businesses, notably e-commerce players.

“E-commerce and other companies that suffered as a result of blocked input service credits would be keen to examine the ruling in-depth and determine whether the value of this ruling could be used in their case,” Singh said.

Ritesh Kanodia, the partner at Dhruva Advisors, said the ruling of the Gujarat court confirms the view that inverted duty structure refunds would also require refunds for input services, giving significant cash flow benefits to businesses in a situation where input service credits have been accrued and no immediate usage window exists.