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Recently, the GST Council in its 45th meeting held on September 17, 2021, has announced that GST rate changes will be brought in concerning goods manufactured by the footwear and textiles industry to correct the existing inverted duty structure.
To give a brief background, in the schema of inverted duty structure, a supplier is entitled to get a refund of the accumulated Input Tax Credit (ITC) under the provisions of section 54 of the Central Goods and Service Tax (CGST) Act, 2017.
The above situation arises since there is no bar for such a supplier to avail of ITC. However, this general rule is subject to an exception which provides that a few goods and services will not be eligible for refund of ITC in an inverted duty structure, which is specifically notified by the government.
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The said notification consists of various goods from the footwear and textile industry. Therefore, the supplier of goods from this industry could not claim refund of accumulated ITC despite falling under the overall coverage of the inverted duty structure scheme. It eventually led to accumulation of huge ITC causing increase in costs for the footwear and textile industry.
To correct the above situation, the GST Council in its 45th meeting recommended an increase in the rates on goods manufactured by the footwear and textile industry from 5% to 12%, which has been fortified by Notification No. 14/2021-Central Tax (Rate) dated November 18, 2021, applicable with effect from January 1, 2022.
The move is aimed to reduce the ITC accumulation in the hands of the industry players by increasing the rate of output GST.
Though the changes have been brought about to correct the situation concerning the inverted duty structure in the footwear and textile industry, an interesting situation can come up in the industry due to such rate increase.
In this regard, the author wishes to draw attention to the anti-profiteering provisions provided in the GST Regulations which would be relevant for the current scenario.
The study report titled ‘Implementation of Value Added Tax (VAT) in India – Lessons for Transition to GST’ released by the Comptroller & Auditor General (C&AG) of India in June 2010 mentioned that there were several cases of profiteering by dealers on account of non-passing of the benefit of tax rate reduction to the consumers in the wake of implementation of VAT across states in the country and therefore, legal teeth were sought to be provided in GST law to check profiteering by businesses.
These legal teeth were incorporated through Section 171 of the CGST Act, 2017 which states that any reduction in the rate of tax on any supply of goods or services or the benefit of the input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
Hence, as per the said section, apart from reduction in the tax rate, any benefit of ITC is also required to be passed on to the recipient of goods or services. It is known that ITC encompasses within its fold two branches or concepts i.e., availment and utilisation. Both of the above, represent two distinct legs concerning the concept of ITC under GST.
Availment of ITC concerns the entries made in the electronic credit ledger of an assessee in order to reflect the ITC amounts. Utilisation, on the other hand, concerns the actual offsetting of the output liability against the balance available in the electronic credit ledger of an assessee.
Coming to the case at hand, the GST council has proposed to increase the output rates of taxes, with effect from January 1, 2022, for products manufactured by the footwear and textile industry to reduce the ITC accumulation.
Therefore, one can argue that on account of the increase in the GST rates, an assessee is availing a benefit of greater utilisation of ITC and therefore, such benefit should be passed on to the recipient. Hence, a dispute may arise that the rate increase has led to the ‘benefit of ITC’.
From the reading of section 171, it may be argued that no additional benefit has accrued to an assessee in such a scenario.
The principle of purposive construction would suggest that one has to interpret Section 171 in light of the intent of the legislation and considering the fact that under the earlier legislations there was no cross availability and utilisation of the credit.
Also Read: GST Council defers hike on textiles from 5% to 12%
On account of the introduction of GST, there was a huge amount of tax rate rationalisation across the Industry.
The report issued by Comptroller & Auditor General (C&AG) as referred above also throws light as to why the anti-profiteering provisions are inbuilt in the GST Regulations.
The author believes that faster utilisation of the ITC cannot amount to benefit for the purposes of Section 171. By increasing the rate of GST in the above said sectors, even though the rate of accumulation of ITC would slow down, however, the accumulation, nonetheless, would still persist, albeit at a slower pace.
Having said this, in some quarters of the industry, there is a belief that faster recovery of accumulated credit would amount to profiteering and therefore, the supplier should either pass on the additional benefit by way of reducing the price of the goods or face the consequences under the anti-profiteering provisions.
Therefore, ambiguity still remains in interpreting as to what is the meaning of the term ‘benefit’ as used in Section 171.
Conclusion
Though the intention of the government in correcting the inverted duty structure in the footwear and textile industry is bona fide, basis the above discussion, the author believes that there may be a scope of possible commercial disputes between the parties for renegotiation of price and concerning the application of anti-profiteering measures against an assessee.
At this very point, a huge commercial dispute has already come up between two parties that are under arbitration.
In the absence of any specific clarification from the government, it is likely that the tax authorities may take a view that speedier utilisation of ITC on account of increase in GST rates is a benefit of ITC accruing to the industry; thus, the benefit of such ITC should be passed on to the recipients.
Hence, the textile and footwear industry need to analyse their existing contracts and pricing structure in view of this rate increase considering the looming risk of commercial disputes with the customers as well as the tax authorities.
The industry could also approach the GST Council and the Finance Ministry to address these grievances and seek a suitable clarification to avoid such a scenario in days to come.
(Sandeep Sachdeva, Executive Partner, & Vishesh Mehrotra, Senior Associate, Lakshmikumaran & Sridharan Attorneys.)
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