The Gujarat High Court (Ahmedabad Bench) has held that a taxpayer cannot transition accumulated pre-GST VAT/CENVAT credit under Section 140 and also simultaneously seek refund of that same credit under Section 54(3) of the GST Acts. The Court clarified that the statute gives a choice: either seek cash refund of old-regime accumulated credit in accordance with the existing law under Section 142(3), or carry that credit forward into GST for utilization. Once the taxpayer chooses to carry forward the credit, the statutory bar in the second proviso to Section 142(3) is attracted, and refund becomes impermissible. Merely because the credit has been validly transitioned and reflected in the electronic credit ledger does not make it refundable under Section 54(3).
Accordingly, the Court refused to grant refund of Rs. 18.74 lakhs. Instead, it held that the petitioner would be entitled to seek re-credit of that amount in its electronic credit ledger for utilization. The petitioner was directed to make an application for re-credit, and the respondent authorities were directed to examine the request in accordance with the statutory provisions.
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The Division Bench comprising of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati observed that the controversy had to be examined through a combined reading of the transitional provisions in Chapter XX, especially Sections 140 and 142(3), along with Sections 49 and 54 of the GST Acts. The Bench observed that Section 140 protects the right of a taxpayer to carry forward eligible credit from the old regime into GST, but Section 142(3) creates a separate statutory mechanism for refund claims arising under the existing law. In particular, the second proviso to Section 142(3) expressly bars refund of any amount of CENVAT/VAT credit where the balance as on the appointed day has already been carried forward under the GST Acts.
The Bench said the legislative scheme clearly distinguishes between utilization of transitioned credit and refund of such credit: once old-regime credit is transitioned into the electronic credit ledger, it can be utilized for payment of output tax, but that does not make it refundable under Section 54(3).
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The Bench further observed that Section 54(3) permits refund of unutilised input tax credit only in the two situations specifically mentioned there, namely zero-rated supplies without payment of tax and accumulation due to inverted duty structure. However, the Bench held that Section 54 deals with refund of credit under “this Act” and the Rules, and not credit accumulated under the erstwhile VAT regime. It rejected the petitioner’s argument that once transitional credit enters the electronic credit ledger, it loses its old-regime character for refund purposes.
On the procedural issue, the Bench accepted that no opportunity of hearing had been given before rejection, though Rule 92 contemplates such hearing where refund is to be rejected. Still, the Bench held that remanding the matter on this ground alone would be an empty formality because the dispute raised a pure question of law that had already been fully argued before the Court. As regards Rule 93, the Bench noted that the department itself stated that if the petitioner applies for re-credit, the amount could be re-credited to the electronic credit ledger through Form GST PMT-03 after due verification.
Briefly, the petitioner, a manufacturer of wooden pallets and boxes, had accumulated excess input tax credit of Rs. 23.74 lakhs under the Gujarat VAT regime as on June 30, 2017 because its inputs were taxed at 15% while its finished goods were taxed at 5%. After GST came into force on July 01, 2017, the petitioner migrated to GST and carried forward this accumulated VAT credit as transitional credit under Section 140 of the GST Acts through Form GST TRAN-1, and that amount was reflected in its electronic credit ledger.
During the GST period from July 01, 2017 to March 31, 2018, further credit accumulated because the inputs suffered CGST and SGST at 9% each, while outward supplies were taxed at 6% each, resulting in a total accumulated ITC of Rs. 28.54 lakhs including the transitional credit. The petitioner then filed a refund claim of Rs. 23.50 lakhs under Section 54(3) read with Rule 89 on account of inverted duty structure, but the department sanctioned only Rs. 4.75 lakhs and rejected the balance Rs. 18.74 lakhs on the ground that the rejected portion represented transitional VAT credit carried forward into GST, which according to the department was not refundable.
