• Aasmee Mangla, Rubel Bareja - NITYA Tax Associates

A critical analysis of VKC Footsteps ruling and Constitutional paradigm of taxation statutes



Historically, the harmony between three organs of Indian Constitution viz, Legislature, Executive and Judiciary, has remained in a tussle, resulting into significant jurisprudence with regard to scope of judicial review of legislations. Subject matters of fiscal and economic importance have not remained untouched by this kerfuffle either. Be that as it may, in the words of Former Chief Justice P N Bhagwati, the Legislature’s discretion for laws relating to economic activities ought to be construed with greater latitude than laws touching civil rights.[1]

The Supreme Court through its recent decision in the case of Union of India v. VKC Footsteps India Private Limited [2] has given yet another reason to debate the scope of the Legislature’s discretion on drafting of economic or fiscal laws – more specifically, GST laws. The division bench comprising of DY Chandrachud and MR Shah JJ. has set aside the Gujarat High Court’s order in the assessee’s case[3] and upheld the Madras High Court’s order in the case of TVL Transtonnelstroy Afcons Joint Venture v. Union of India.[4]

Before diving deep into the turmoil, it is necessary to note the background behind promulgation of GST Law. Under the erstwhile Indirect Tax regime, due to separate laws governing Central and State levies, the cascading of taxes remained a problem as credit of State levy could not be set off against the Central levy and vice versa. Hence, GST Law was introduced to replace multiple taxes and to mitigate cascading effects.

An extension to the cascading issue is the accumulation of credits due to higher rate of tax on inputs compared to the rate of tax on outward supplies (commonly referred to as ‘Inverted Duty Structure’). The taxpayers falling under Inverted Duty Structure are unable to set-off higher taxes paid at their input stage which leads to working capital blockage. Therefore, the need for solving the credit accumulation issue was categorically discussed at the time of framing of GST Laws. The same is evident from the first discussion paper issued by the Empowered Committee of State Finance Ministers on GST Model Law. It was discussed that the problem related to credit accumulation should be avoided by both Centre and State except in cases of exports, inverted duty, etc., where the refund/adjustment should instead be allowed and completed in a time bound manner. Even in erstwhile State VAT Laws, the problem of inverted tax was noticed and provisions for refund of unadjusted credit were inserted.

The situation leading to Inverted Duty Structure can be well understood by a practical example for a tractor manufacturer:

Procurement of inputs used for manufacture of tractors (say engine, tyre, gear box etc.) of Rs. 70 with GST at 18%

Procurement of input services and capital goods of Rs. 30 attracting average GST rate of 18%

Supply of tractor with profit margin, say Rs. 120 attracting GST of 12%

In the above transaction, a tractor manufacture will pay Rs. 18 GST on its procurements, however its output liability will be limited to Rs. 14.5. Hence, resulting into Rs. 3.5 of unutilized credit which will keep accumulating over the period of time.

Under GST Law, Section 54(3)[5] provides for refund of any unutilized accumulated Input Tax Credit (‘ITC’) arising due to Inverted Duty Structure and Rule 89(5)[6] prescribes the formula for calculation of refund thereof.

In VKC Footsteps, the entire dispute revolved around this issue and interpretation of Section 54(3) and validity of corresponding Rule 89(5). The apparent anomaly one can gather after reading these provisions is that Section 54(3) provides for the refund of any unutilized ITC in case the same is accumulated on account of the Inverted Duty Structure, while Rule 89(5) restricts the amount of unutilized ITC only to inputs and leaves out ITC of input services and capital goods.

Thus, the Supreme Court, observed various constitutional and legal principles and upheld the validity of Rule 89(5) on following grounds:

  • Government has wide discretion to make fiscal policies subject to any arbitrariness leading to violation of Article 14[7];

  • Refund is a statutory right and not a constitutional guarantee; and

  • Section 54(3) itself restricts refund of unutilized ITC only on inputs and thus Rule 89(5) is aligned

The Authors in the succeeding paragraphs have critically examined some of the grounds taken by the Apex Court while pronouncing its judgment.

Refund:Constitutional Guarantee or Statutory Right?

The expression ‘refund’ is defined as to repay; to give back; to restore; reimburse.[8] Refund of accumulated ITC is akin to concessions, exemptions, rebates, incentives etc., which are covered under the scope of Legislature’s law-making power[9]. The Constitution does not provide any guarantee or entitlement to the taxpayers for a right of refund. Furthermore, since entitlement of ITC is also a concession/benefit, its refund will also take same stature.

Therefore, at the very most, a refund can be understood as a benefit/grant conferred by the Government via statutory framework, wherein refund is granted and regulated within the four corners of its parent statute and should be subject to strict interpretation.[10] The Legislature is empowered to prescribe any inclusion or omission of class(s) of persons / category of objects eligible for refund.

In VKC Footsteps, the Supreme Court held that refund of ITC for input services cannot be warranted as there is no constitutional entitlement of such refund and it is merely a benefit laid down via the statute. In the Authors’ view, the said observation of the Supreme Court is correct, as nothing prohibits the Legislature from restricting certain benefits and concessions. Notably, the legislature has already prescribed a list of goods where refund of ITC is not allowed despite Inverted Duty Structure (specified fabrics and railway goods) and the same is well within the powers of legislature.

Drafting of Fiscal and Economic Laws: Extent of Government’s discretion

Notably, Section 54(3) read with Rule 89 provides two categories wherein refund of unutilized ITC is allowed, i.e., in case of zero-rated supplies (‘exports’) and in case of Inverted Duty Structure. In terms of these provisions, exporters are allowed refund of ITC on both inputs and input services while domestic suppliers are allowed refund only of ITC on inputs. In VKC Footsteps, the argument was made that these provisions are violative of Article 14 as they discriminate between two classes i.e., exporters and domestic suppliers. The Apex Court has rejected this argument and rightly so in the Authors’ opinion.

Article 14 prohibits class legislation i.e., the state shall not deny ‘equal protection of the laws’ and ‘equality before the law’ to any person within territories of India. However, it is trite law that the right to equality is subject to the doctrine of reasonable classification,[11]and the legislature has to establish that there exists an intelligible differentia having nexus with object of legislature while differentiating two classes. Hence, mere differential treatment itself is not violative of Article 14. This is because the presumption is always in favor of constitutionality of a legislation, more so in the cases where taxation laws or economic laws are concerned.[12]

In taxation laws, exporters and domestic suppliers are inherently different classes. The exporters are always given additional incentives to encourage exports and thereby balancing the trade deficit of Country. Hence, exporters and domestic suppliers are not comparable for the purposes of Article 14.

Furthermore, the Courts have consistently held that the Legislature has wide discretion to devise classes as to whom to tax, whom not to tax, whom to give incentives, lay down rates of taxation, benefits or concessions.[13] When taxation laws are concerned, the principle of equivalence or perfect equality is impossible and unattainable.[14] Therefore, unless a legislation is clearly unjust and arbitrary, or lacks all rational basis of classification, the same cannot be held as constitutionally invalid.

Hence, restricting refund of ITC on input services to domestic suppliers is well within the power of the legislature.

Interpretation of Section 54(3): Proviso placing qualification or restriction?

In VKC Footsteps, the Supreme Court has interpreted clause (ii) of first proviso to Section 54(3) as a restriction limiting refund amount to ITC on inputs only. However, in the Authors’ view, the expression ‘in cases other than’ used in proviso clearly infers that proviso aims at providing categories/scenarios where a taxpayer will be allowed refund of unutilized ITC. In other words, Section 54(3) allows the refund of ‘any unutilized ITC’ irrespective of its nature i.e. inputs, input services or capital goods. The proviso appended thereto is merely a qualification/condition to eligibility of refund, which once fulfilled, will allow complete refund of ‘any unutilized ITC’.

The fact that provision in this case is only prescribing situations/cases where refund will be allowed is evident from the Minutes of 6th GST Council Meeting held on December 11, 2016, wherein it was proposed that a proviso shall be inserted to grant power to the Council to not allow refund in certain cases even when there is Inverted Duty Structure. The proposal was approved by Council and hence proviso was inserted to disallow refund in all categories other than those mentioned and not to restrict quantum of refund in already allowed category.

The expression used in the Proviso is plain, unambiguous, and leading to a single meaning. Hence, interpretating said proviso in a sense that it creates restriction on the quantum of refund would be inaccurate as it would go against the rule of literal construction.

Hence, no restriction on quantum of refund emerges from a reading of Section 54(3).

Scope of Delegated Legislation – Vires of Rule 89(5) vis-à-vis Section 54(3)

Now that we understand that Section 54(3) does not place any restriction on quantum of refund while Rule 89(5) does, it is important to understand if the same is constitutionally valid.

Legislatures in India have been given wide powers to delegate and Rules have been held to be one of the most common form of a delegated legislation. The Constitution[15] entrusts the law-making powers to Parliament and State Legislatures. Delegated legislation is principally transfer of law-making power from Legislature to Executive organ of Government. Notably, fewer formalities are involved when Executive wing takes color of elected Legislature. Therefore, limiting the scope of such power becomes indispensable in wake of the possible misuse.

A delegate is only empowered to carry out the policy within the guidelines laid down by the legislature. Hence, a delegated legislation can essentially be declared invalid if the same is violative of provisions of enabling Act. Thus, the executive cannot go beyond the authority conferred by such rule-making power to make any provision inconsistent with the Act and thus override it.[16] In the instant case, the Legislature defeated the provisions of the enabling Act by imposing a restriction on grant of refund, which is inconsistent and beyond the enabling Act.

In VKC Footsteps, the Supreme Court upheld the vires of Rule 89(5) on the ground that Section 54(3) itself imposes restriction on refund and thus there is no disharmony between the Act and Rule. Based on our discussion in the preceding paragraphs, and in the absence of any such restriction in Section 54(3), Rule 89(5) is completely ultra vires Section 54(3).


There is no doubt that beneficiary provisions under fiscal laws are strictly governed by a statutory framework and cannot be exercised as constitutional right. Further, the legislature has wide law-making discretion with respect to taxation laws. However, it is undeniable that the intricacies involved in such fiscal matters is of the highest stake and hence the laws should be framed with utmost care and within the powers conferred by the Constitution. Rules cannot go beyond the provisions of enabling Act. In case at hand, Rule 89(5) lacks legal backing and should be struck down for restricting the scope of refund of unutilized ITC under Section 54(3). To put it briefly, an appropriate judicial review of such unconstitutional legislations is the need of the hour.


[1] RK Garg v. Union of India, (1981) 4 SCC 675 [2] Civil Appeal No. 4810 of 2021 [3] 2020 (43) G.S.T.L. 336 (Guj.) [4] 2020 (43) G.S.T.L. 433 (Mad.) [5] Section 54(3) of the Central Goods and Services Tax Act, 2017 available here [6] Rule 89(5) of the Central Goods and Services Tax Rules, 2017 available here [7] Article 14 of the Constitution of India, 1950 [8] P Ramanatha Aiyar, Advance Law Lexicon (6th Ed. Lexis Nexis), ‘Refund’ [9] Satnam Overseas Export v. State of Haryana, (2003) 1 SCC 561; State of Uttar Pradesh v. Jaiprakash Associates, (2014) 4 SCC 720 [10] Mangalore Chemicals & Fertilizers Limited v. Dy. Commissioner of Commercial Taxes, (1992) Supp. 1 SCC 21; Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236 [11] Maneka Gandhi v. Union of India, (1978) 2 SCR 621 [12] Supra 1; Federation of Hotel & Restaurant Association of India v. Union of India, (1989) 3 SCC 634 [13] State of Uttar Pradesh v. Kamla Palace, (2000) 1 SCC 557 [14] Spences Hotel Private Limited v. State of West Bengal, (1991) 2 SCC 154 [15] The Constitution of India, 1950 [16] State of Madhya Pradesh v. Bhola, (2003) 3 SCC 1


Aasmee Mangla, Managing Associate

Rubel Bareja, Associate

NITYA Tax Associates Cite this Article - Puneet Bansal, Aasmee Mangla, Rubel Bareja, A critical analysis of VKC Footsteps ruling and Constitutional paradigm of taxation statutes (Tax Terminal Blog, 8th October 2021 ) <https://www.taxterminal.in/post/a-critical-analysis-of-vkc-footsteps-ruling-and-constitutional-paradigm-of-taxation-statutes>

Article - A critical analysis of VKC Footsteps ruling and Constitutional paradigm of taxat
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