The Court observed that the impact of the first proviso to Section 54(3) of the CGST Act and Explanation 1 to Section 54 is that a refund of unutilized input tax credit (ITC) shall be allowed only in cases falling under clauses (i) and (ii) to first proviso.

Refund of Unutilized ITC on Input Services Under Inverted Duty Structure Post VKC Footsteps Judgment
1. Pre-VKC Footsteps Position
Section 54(3)(ii) of CGST Act allowed refund of unutilized Input Tax Credit (ITC) only for inputs (not input services or capital goods) under an inverted duty structure (where input tax rate > output tax rate).

Rule 89(5) of CGST Rules restricted refunds to ITC on inputs only, excluding input services.

Controversy: Businesses argued this was discriminatory and violated Article 14 (Equality) of the Constitution.

2. Supreme Court’s Ruling in VKC Footsteps v. Union of India (2021)
Key Holding:

5:4 Majority: Upheld Rule 89(5), denying refund of ITC on input services under inverted duty structure.

Reasoning:

Parliament intended to limit refunds to inputs only to prevent misuse.

No constitutional violation as classification between inputs and input services was based on intelligible differentia.

Dissenting View (Minority):

Exclusion of input services was arbitrary and violated Article 14.

3. Post-VKC Footsteps Legal Position
Refund Permissibility:

Only ITC on inputs (not input services) is refundable under inverted duty structure.

Input services & capital goods remain ineligible for refund under Section 54(3)(ii).

Exceptions:

Exporters can claim refund under Rule 96 (IGST refund mechanism).

Special cases (e.g., inverted duty due to GST rate changes) may warrant reconsideration.

4. Government’s Clarificatory Amendments (Post-Judgment)
No legislative change post-VKC Footsteps to include input services.

CBIC Circulars reiterate strict adherence to Rule 89(5).

5. Practical Implications for Businesses
Tax Planning:

Optimize procurement to maximize input-based ITC (e.g., raw materials over services).

Explore alternative refund mechanisms (e.g., export benefits).

Litigation Strategy:

Pending claims for input services refunds are likely untenable post-VKC Footsteps.

Constitutional challenges (if any) must argue new grounds (e.g., economic distortion).

6. Comparative Global Perspective
Malaysia & Canada: Allow broader ITC refunds, including services.

EU VAT: No inverted duty structure; refunds are generally permissible.

7. Conclusion
Current Law: Refund of unutilized ITC on input services under inverted duty structure remains barred post-VKC Footsteps.

Future Outlook:

Legislative amendment needed to expand refund eligibility.

Industry representations for parity between inputs and input services may gain traction.

Recommendations for Businesses:

Reassess supply chains to minimize input services reliance where refunds are critical.

Monitor GST Council meetings for potential policy shifts.

Explore judicial workarounds (e.g., writ petitions on fresh constitutional grounds)