The Gujarat High Court has said that a taxpayer who opts to carry forward accumulated VAT input tax credit into the GST regime cannot later seek a cash refund of the same credit.
The court upheld the rejection of a refund claim of Rs 18.75 lakh. It said that while transitional credit can be utilised to release output tax liability, it cannot be refunded once it has been carried forward into the GST regime.
A division bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati partly permitted a petition of Dilip Babubhai Patel, proprietor of Shree Umiya Timbers.
“The legislature unequivocally intended that a registered taxpayer’s claim to ITC, spanning both the pre-GST and post-GST regimes, should not be frustrated. However, a clear demarcation exists between the utilisation and the refund of ITC. The legislative intent dictates that the GST regime permits the utilisation of accumulated ITC from the erstwhile regime for output tax liability only if it is successfully transitioned into the ECL. Conversely, cash payment of accumulated credit from the erstwhile regime is permissible only upon filing a refund claim,” the court stated.
The manufacturers of wooden pallets and boxes, Patel, had accumulated excess VAT Input tax credit before the inception of GST. It is because his inputs drew VAT at 15% while his finished goods were charged to tax at 5%. After the GST came into effect, he carried forward approximately ₹23.75 lakh of accumulated VAT credit via Form GST TRAN-1, following which the amount was reflected in his Electronic Credit Ledger (ECL).
By March 2018, the Electronic Credit Ledger showed an accumulated ITC of approximately ₹28.55 lakh, which included transitional credit. Patel then applied for a refund of ₹23.50 lakh due to the inverted duty structure. The tax authorities approved a refund of about ₹4.75 lakh but denied the remaining ₹18.75 lakh, stating that the part showing transitional credit carried over from the VAT regime was not refundable.
In his argument before the High Court, Patel contended that once the transitional credit was included in the Electronic Credit Ledger, it became indistinguishable from GST input tax credit and should therefore be eligible for a refund.
The State opposed Patel’s argument, citing the second proviso of Section 142(3) of the GST Act. They argued that a taxpayer should choose either to seek a refund of pre-GST credit under the previous law or to carry it forward into the GST regime, but cannot claim both benefits.
The Court, considering the claim of the State, said that Parliament had consciously distinguished between the usage of transitional credit and its refund. It said that while credit carried forward under the transitional norms could be utilised to release output tax liability, the statutory scheme prohibits its refund once the taxpayer has exercised the option to transition it into GST.
“A taxpayer can either seek a refund under the existing laws to be paid in cash under Section 142(3) of the GST Act, or choose to transfer the credit. If the accumulated credit is carried forward, the statutory bar under the second Proviso to Section 142(3) of the GST Act gets triggered, making refund impermissible,” the court stated.
The court said that the authorities had not complied with the guidelines mentioned under Rule 93 of the GST rules for re-crediting the amount related to the rejected refund claim. If Patel applies for re-credit of the rejected amount, then the authorities will analyse the request after checking the facts and records.
Also Read: How GST Software Handles Input Tax Credit (ITC) Tracking
When the claim is found to be considerable, then they will pass an order in Form GST PMT-03 within 12 weeks from receipt of a certified copy of the judgment.
| Case Title | Dilip Babubhai Patel, Proprietor of M/s Shree Umiya Timbers Vs State of Gujarat |
| Case No. | R/Special Civil Application No.21685 of 2019 |
| For Petitioner | Kuntal a Parikh |
| For Respondent | Mr Raj Tanna |
| Gujarat High Court | Read Order |
