Taxpayer Cannot Claim Refund After Transitioning VAT Input Tax Credit To GST: Gujarat High Court

The Gujarat High Court has recently held that a taxpayer who chooses to carry forward accumulated VAT input tax credit into the GST regime cannot later seek a cash refund of the same credit.

Upholding the rejection of a refund claim of ₹18.75 lakh, the court observed that while transitional credit can be used to discharge 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 allowed a petition filed by 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 utilization and the refund of ITC. The legislative intent dictates that the GST regime permits the utilization 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 observed.

Patel, who manufactures wooden pallets and boxes, had accumulated excess VAT input tax credit before the rollout of GST because his inputs attracted VAT at 15% while his finished goods were taxed at 5%. After GST came into force, he carried forward about ₹23.75 lakh of accumulated VAT credit through Form GST TRAN-1, following which the amount was reflected in his Electronic Credit Ledger (ECL).

By March 2018, the Electronic Credit Ledger reflected accumulated input tax credit of about ₹28.55 lakh, including the transitional credit. Patel then sought a refund of ₹23.50 lakh on account of the inverted duty structure. The tax authorities sanctioned about ₹4.75 lakh but rejected the remaining ₹18.75 lakh, holding that the portion representing transitional credit carried forward from the VAT regime was not refundable.

Before the High Court, Patel argued that once the transitional credit became part of the Electronic Credit Ledger, it was indistinguishable from GST input tax credit and therefore eligible for refund.

The State opposed the plea, relying on the second proviso to Section 142(3) of the GST Acts and contending that a taxpayer must choose either to seek a refund of pre-GST credit under the earlier law or carry it forward into the GST regime, but could not claim both benefits.

Accepting the State's contention, the court held that Parliament had consciously distinguished between the utilization of transitional credit and its refund. It ruled that while credit carried forward under the transitional provisions could be used to discharge output tax liability, the statutory scheme barred its refund once the taxpayer had 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 Acts, or choose to transit the credit. If the accumulated credit is carried forward, the statutory bar under the second Proviso to Section 142(3) of the GST Acts gets triggered, making refund impermissible,” the court held.

The court also observed that the authorities had not followed the procedure prescribed under Rule 93 of the GST Rules for re-crediting the amount corresponding to the rejected refund claim.

It directed that if Patel applies for re-credit of the rejected amount, the authorities shall examine the request after verifying the relevant facts and records.

If the claim is found admissible, they shall pass an appropriate order in Form GST PMT-03 within 12 weeks from receipt of a certified copy of the judgment.

For Petitioner:  Kuntal A. Parikh

For Respondents:  Raj Tanna, AGP