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August 29, 2023

GST Refund of Inverted Duty on Input Services – Union of India vs. VKC Footsteps India Pvt. Ltd.

GST Refund of Inverted Duty on Input Services – Union of India vs. VKC Footsteps India Pvt. Ltd.


The case revolves around the issue of refunding unutilized Input Tax Credit (ITC) in the context of an inverted duty structure under the Goods and Services Tax (GST) regime. The legal dispute centers on whether GST taxpayers are eligible for refunds on the unutilized ITC for input services, based on the interpretation of the amended Rule 89(5) of the CGST Tax Rules 2017.


The introduction of GST, a new system of indirect taxation, has been met with skepticism due to its significant changes. This case specifically deals with the refund of unutilized ITC within an inverted duty structure. The court distinguishes between input goods and input services, particularly under the amended Rule 89(5) of the CGST Tax Rules 2017. The court’s judgment aligns with the Madras High Court’s perspective, differing from the Gujarat High Court’s viewpoint. The cases of T. Afcons joint venture and VKC Footsteps India (P) Ltd. are relevant precedents.

Rule 89(5) outlines a formula to calculate the maximum refund amount for ITC. This rule, effective from April 2018, excluded input services from the calculation. Consequently, many taxpayers faced challenges in obtaining refunds for unutilized ITC related to input services. Refunds are a form of exemption and require accurate interpretation.

Case Facts:

Understanding Section 54(3) is crucial to grasp the case’s facts. This section pertains to refunding unutilized ITC at the end of a tax period, with two qualifying criteria: zero-rated supplies and the inverted duty structure. The latter situation arises when the tax rate on input supplies exceeds that on output supplies, leading to an accumulation of unutilized ITC.

However, Rule 89(5) does not consider input supplies when calculating net ITC for determining the refund amount. VKC Footsteps India (P) Ltd., the assessee, argues that this omission creates an imbalance and can result in a cascading effect of taxes.

Legal Issue:

The key issue at hand is whether the High Court of Gujarat can issue an order to the Union of India.


The High Court possesses the authority to issue orders to any government, regardless of its territorial location. The essential requirement is that the cause of action must fall within the court’s jurisdiction. In the VKC and Union of India case, the court granted VKC’s refund claim by incorporating unutilized input tax credit from “input services” into the concept of “net input tax credit.” The cause of action arose in Gujarat, allowing the High Court to address the matter and issue an order to the Union of India, despite its non-local status.

Observation and Judgment:

Upon reviewing the arguments presented, the Supreme Court upheld the Madras High Court’s decision, affirming their judgment. The court dismissed the appeals challenging this verdict. However, the appeals against the Gujarat High Court’s judgment were allowed. The division bench of the Gujarat High Court found Section 54(3) and Rule 89(5) to be ultra vires. Consequently, the Union of India’s appeal against the Gujarat High Court’s judgment in the VKC Footsteps India case was accepted, and the judgment was overturned.


After thorough consideration, the Supreme Court ruled in favor of the Union of India. The revenue generated is a crucial factor in legislative decisions. The withholding of ITC on services contributes to government income. However, the legislation must be carefully scrutinized for any potential shortcomings and injustices to taxpayers. Any law that neglects the well-being of taxpayers cannot be deemed effective.

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