Authored By: RAJAALAN A
Central University of Tamil Nadu
Abstract
This article examines the architecture of input tax credit (“ITC”) denial under India’s Goods and Services Tax regime, focusing on Rule 89(5) of the Central Goods and Services Tax Rules 2017 and the rectification bar in Section 39(9) of the Central Goods and Services Tax Act 2017. It argues that the current framework, as confirmed by the Supreme Court in Union of India v VKC Footsteps India Pvt Ltd and Union of India v Bharti Airtel Ltd, subordinates the principle of tax neutrality to considerations of procedural formalism and administrative convenience. Drawing on a comparative analysis of the European Union’s VAT Directive and the jurisprudence of the Court of Justice of the European Union, which requires that formal or procedural shortcomings be weighed proportionately against a taxpayer’s substantive entitlement, the article contends that India’s blanket restrictions are neither textually compelled nor necessary to protect revenue. It proposes a calibrated legislative amendment extending the inverted-duty refund to input services and permitting rectification of returns affected by demonstrable systemic failure, subject to verification safeguards against fraud. The article concludes that such reform would better align India’s ITC regime with the neutrality principle GST was designed to serve.
Keywords: GST, Compliance, Input Tax Credit, VAT.
I. Introduction
Businesses across India currently have thousands of crores of rupees locked up as unutilised input tax credit, funds that remain frozen not because the tax was never due to them, but because the refund and rectification mechanisms under the Goods and Services Tax framework are narrower than the entitlement the statute otherwise creates. This article argues that the current architecture of input tax credit (“ITC”) denial under the Central Goods and Services Tax Act 2017 (“CGST Act”) subordinates the foundational principle of tax neutrality to considerations of administrative convenience and procedural formalism.
The credit mechanism was designed to eliminate the cascading effect of tax on tax, yet Rule 89(5) of the Central Goods and Services Tax Rules 2017 and the rigid rectification timeline under Section 39(9) have, in practice, converted a substantive entitlement into a conditional privilege. Where refund or rectification is denied for reasons unconnected to fraud or revenue loss, the taxpayer bears a tax burden that Parliament never intended to impose.
It is submitted that this imbalance is neither compelled by the statutory text nor justified by the policy rationale of preventing revenue leakage, and that it can be corrected through targeted legislative amendment without compromising the anti-fraud safeguards that legitimately constrain the credit chain. The article proceeds in four parts: it first sets out the statutory framework governing ITC refund and rectification; it then examines the two leading Supreme Court decisions that have shaped the present position; it offers a critical evaluation of that position; and it concludes with a comparative examination of the European Union value added tax regime before proposing reform.
II. Main Body
A. Legal Framework
Section 16 of the CGST Act entitles a registered person to take credit of tax charged on inward supplies used in the course of business, subject to conditions relating to possession of a valid invoice, receipt of goods or services, and payment of tax by the supplier[1]. Where accumulated credit cannot be utilised, Section 54(3) permits a refund, but only in two circumstances: zero-rated supply without payment of tax, and an inverted duty structure, where the rate of tax on inputs exceeds the rate on output supplies[2]. Rule 89(5), which prescribes the formula for computing the inverted-duty refund, confines “net ITC” to tax paid on input goods and excludes tax paid on input services from the refundable amount[3].
A separate but related constraint governs the correction of errors in periodic returns. Section 39(9), read with Rule 61(5), permits rectification of an error or omission only in the return for the month or quarter in which the error is noticed, and not in the return for the period to which the error actually relates[4]. This provision assumed particular significance during the transitional phase of GST implementation, when Form GSTR-3B was introduced as a stop-gap summary return because the statutorily contemplated forms had not yet become operational. Taken together, these three provisions define the outer limits within which a taxpayer may recover or reallocate credit that has, in an economic sense, already been paid to the exchequer.
B. Case Law Analysis
The Supreme Court’s decision in Union of India v VKC Footsteps India Pvt Ltd is the leading authority on the scope of the inverted-duty refund[5]. The Gujarat High Court had earlier held Rule 89(5) ultra vires Section 54(3), reasoning that excluding input services from “net ITC” discriminated between goods and services without statutory basis[6]. The Supreme Court reversed this position, holding that Parliament had deliberately confined the refund to the two categories identified in the first proviso to Section 54(3), and that the use of a double-negative formulation in the provision reflected a considered legislative choice to restrict, rather than expand, refund entitlement[7]. The Court thereby upheld Rule 89(5) as intra vires, notwithstanding that the practical effect is to leave a portion of genuinely accumulated credit permanently unrefunded.
The second decision, Union of India v Bharti Airtel Ltd, concerned a taxpayer that had estimated its ITC entitlement during the transitional months of July to September 2017 because Form GSTR-2A was not yet functional, and had consequently discharged a substantial part of its output liability in cash rather than through available credit[8]. The Delhi High Court had permitted rectification of the earlier returns, accepting that the taxpayer’s error was attributable to the Department’s own systemic failure[9]. The Supreme Court set that judgment aside, holding that rectification is permissible only in the manner prescribed by Section 39(9) and Rule 61(5), that is, in the period in which the error is discovered, and that a circular restricting retrospective correction was consistent with the statutory scheme[10]. The result denied the taxpayer roughly nine hundred and twenty-three crore rupees in relief, even though the underlying error stemmed from the non-operability of a government portal rather than any fault of the taxpayer.
Read together, the two decisions reveal a consistent judicial method: where a provision is capable of a restrictive or an expansive reading, the Court has favoured the reading that protects statutory formalism and revenue certainty over one that preserves the taxpayer’s underlying economic entitlement to credit already paid. This is a defensible interpretive stance in isolation, but its cumulative effect on the credit chain calls for closer scrutiny.
C. Critical Evaluation
The central difficulty with the present position is that it treats ITC denial arising from procedural mismatch and denial arising from fraudulent claims as though they raised the same policy concern, when in fact they do not. The credit mechanism exists to ensure that tax is levied only on the value added at each stage of supply; a taxpayer denied refund of accumulated credit on input services, or denied rectification of a return corrupted by a non-functional government portal, has still paid real tax on real transactions. Denying relief in such cases does not protect revenue that was ever legitimately at risk; it simply transfers the cost of administrative or systemic shortcomings onto compliant taxpayers.
The Supreme Court’s own earlier jurisprudence recognised that the object of turnover taxation is to remove burdens inherent in a cascading tax structure, not to create new ones[11]. VKC Footsteps does not repudiate this principle so much as subordinate it to a textual reading of Section 54(3) that treats the absence of an express reference to input services as a deliberate exclusion rather than a drafting gap. That reading is plausible, but it is not compelled, and a legislature genuinely concerned with neutrality could resolve the ambiguity by amendment without disturbing the Court’s separation-of-powers reasoning that refund is a statutory, not a constitutional, entitlement.
A natural objection is that relaxing the rectification timeline or extending the refund base would expose the exchequer to manipulation, since taxpayers could retrospectively reallocate credit to periods most favourable to them, or fabricate input service claims after the fact. This concern is legitimate and explains why jurisdictions that permit substantive correction typically pair it with robust verification requirements rather than open-ended relaxation. The response, however, is not to foreclose correction altogether but to calibrate it: a reform could permit rectification or the input-services refund only where the taxpayer demonstrates, through verifiable records, that the error or accumulation arose from a specific, non-fraudulent cause, such as portal non-functionality or an inverted rate structure created by the Government’s own notifications. Such a standard would preserve deterrence against abuse while relieving taxpayers of a burden they did not create.
A further concern is systemic rather than doctrinal. Because GSTR-3B was conceived as a temporary measure pending the operability of the originally envisaged returns, treating its rigid rectification rule as a permanent feature of the law risks entrenching a transitional compromise as settled doctrine. The Bharti Airtel outcome is defensible as an application of the statute as it then stood, but it illustrates why a sunset review of provisions adopted for transitional convenience is necessary once the underlying technical constraints that justified them have been resolved.
D. Comparative Perspectives
The European Union’s value added tax regime offers a useful point of comparison because it confronts the same underlying tension between formal compliance and substantive entitlement, yet resolves it differently. Article 168 of the VAT Directive establishes the right to deduct input tax as a core feature of the neutrality principle, and the Court of Justice of the European Union (“CJEU”) has repeatedly held that this right may not be denied for purely formal or procedural reasons once the substantive conditions for deduction are satisfied[12].
In Brose Prievidza, decided in October 2025, the CJEU held that a Member State could not refuse a cross-border VAT refund merely because of a procedural or administrative technicality unconnected to the underlying economic reality of the transaction, reaffirming that refund claims must be assessed on their substance[13]. The Eighth and Thirteenth VAT Directives similarly structure the refund mechanism for non-established taxable persons around demonstrable economic activity rather than rigid procedural cut-offs, subject to safeguards against abuse[14].
The CJEU’s approach does not treat neutrality as absolute; deduction may still be refused where the taxpayer knew or should have known that a transaction was connected to fraud, and formal requirements retain force where they are indispensable to verifying a claim. What distinguishes the EU position is its consistent insistence that formal or administrative shortcomings be weighed proportionately against the underlying substantive right, rather than being allowed to extinguish that right automatically. An Indian ITC framework that adopted a similarly proportionate standard, preserving strict scrutiny for cases involving suspected fraud while allowing substantive correction where none exists, would more faithfully realise the neutrality objective that GST shares with EU VAT, without abandoning the anti-abuse safeguards that both systems require.
III. Conclusion
This article has argued that the present ITC denial framework under Indian GST law, as shaped by Rule 89(5) and Section 39(9) and confirmed in VKC Footsteps and Bharti Airtel, privileges procedural formalism over the substantive neutrality that the credit mechanism was designed to secure. The two decisions are legally sound applications of the statute as drafted, but the statute itself draws lines that are difficult to justify once revenue protection is separated from mere administrative convenience.
It is submitted that Parliament should amend Section 54(3) and Rule 89(5) to extend the inverted-duty refund to input services, and should introduce a calibrated exception to the Section 39(9) rectification bar for errors demonstrably caused by systemic or governmental failure, in each case subject to verification requirements that guard against fraudulent manipulation. The CJEU’s proportionality-based jurisprudence under the EU VAT Directive demonstrates that such calibration is administrable without inviting abuse.
Absent reform, the credit mechanism will continue to operate asymmetrically: rigorous in denying relief to compliant taxpayers caught by procedural technicalities, yet no more effective in deterring the fraudulent claims that formal restrictions were originally designed to prevent. Realigning the rule with its underlying rationale is a modest legislative undertaking that would bring Indian GST law closer to the tax-neutrality principle it was enacted to serve.
IV. Reference(S): and Bibliography
Legislation
Central Goods and Services Tax Act 2017 (India).
Central Goods and Services Tax Rules 2017 (India).
Council Directive 2006/112/EC on the common system of value added tax [2006] OJ L347/1.
Directive 2008/9/EC laying down detailed rules for the refund of value added tax provided for in Directive 2006/112/EC [2008] OJ L44/23.
Cases
Bharti Airtel Ltd v Union of India, 2020 SCC OnLine Del 557 (Delhi HC).
Case C-234/24 Brose Prievidza (CJEU, 23 October 2025).
Printers (Mysore) Ltd v Assistant Commercial Tax Officer [1994] 2 SCC 434 (SC).
Union of India v Bharti Airtel Ltd, 2021 SCC OnLine SC 1006 (SC, 28 October 2021).
Union of India v VKC Footsteps India Pvt Ltd, Civil Appeal No 4810 of 2021 (SC, 13 September 2021); (2022) 2 SCC 603.
VKC Footsteps India Pvt Ltd v Union of India, R/Special Civil Application No 2792 of 2019 (Guj HC, 24 July 2020).
Secondary Sources
Case Analysis: Union of India v VKC Footsteps India (P) Ltd (Supreme Court) (TaxGuru).
‘Residual Credit Rift: Navigating the ITC Closure Conundrum’ (TCC Law Review).
‘Revision of Form GSTR-3B Not Allowed: Supreme Court in the Case of Bharti Airtel’ (Taxmann, 2023).
‘EU Court Reinforces VAT Deductibility Rights’ (VATCalc, March 2026).
‘VAT Refund Regime: The Brose Prievidza Judgment’ (Eurotax, November 2025).
[1]Central Goods and Services Tax Act 2017, s 16.
[2]Central Goods and Services Tax Act 2017, s 54(3).
[3]Central Goods and Services Tax Rules 2017, r 89(5).
[4]Central Goods and Services Tax Act 2017, s 39(9); Central Goods and Services Tax Rules 2017, r 61(5).
[5]Union of India v VKC Footsteps India Pvt Ltd, Civil Appeal No 4810 of 2021 (SC, 13 September 2021); (2022) 2 SCC 603.
[6]VKC Footsteps India Pvt Ltd v Union of India, R/Special Civil Application No 2792 of 2019 (Guj HC, 24 July 2020), reversed on appeal.
[7]ibid [para on legislative intent, confining refund to the two categories in the first proviso to s 54(3)].
[8]Union of India v Bharti Airtel Ltd, 2021 SCC OnLine SC 1006 (28 October 2021).
[9]Bharti Airtel Ltd v Union of India, 2020 SCC OnLine Del 557 (Delhi HC), reversed on appeal.
[10]ibid.
[11]Printers (Mysore) Ltd v Assistant Commercial Tax Officer [1994] 2 SCC 434.
[12]Council Directive 2006/112/EC on the common system of value added tax [2006] OJ L347/1, art 168.
[13]Case C-234/24 Brose Prievidza (CJEU, 23 October 2025).
[14]Directive 2008/9/EC laying down detailed rules for the refund of value added tax [2008] OJ L44/23.
