GST Breaking: Madras High Court affirms virus of GST ITC rule 36(4)

In a recent matter, the Madras High Court has dismissed a writ petition challenging Rule 36(4) of the respective GST Rules as violative of Article 14 of the Constitution of India.

Arguments of Petitioner

The principle ground of attack of the Petitioner to Sub-Rule 4 to Rule 36 of the respective GST Rules is that there are no restrictions under Section 16 of both the respective GST Acts and therefore the restrictions in the form of restricted credit equivalent to the eligible credit on the percentage of eligible credit was arbitrary and ultra vires to the provisions and the Rules of the respective GST enactments.

Learned counsel for the Petitioner submitted that sub-rule 4 to Rule 36 of the respective GST Rules are ultra vires the respective GST Acts since it prescribes restrictions with regard to availment of Input Tax Credit (ITC). Even though, Section 43 of the CGST Act empowers the Central Government to make Rules restricting availment of Input Tax Credit (ITC) on supplies not declared by the suppliers in Form GSTR-1, the same has not been notified by the Central Government.

It was submitted by the learned counsel for the Petitioner that Rule 36(4) of the respective GST Rules inserted vide Notification No.49/2019- Central Tax (CT) dated 09.10.2019 whereby the sub-rule 4 to Rule 36 of the GST enactments was incorporated. It was submitted that the sub-rule (4) to Rule 36 of the GST enactments could have been brought into the respective Rules only after Section 43A of the respective GST enactments were implemented. It was submitted that although Section 43A of the respective GST enactments were incorporated, it is never been notified.

It is therefore submitted by the learned counsel for the Petitioner that although Section 43A of the respective GST enactments were inserted by the Central Goods and Services Tax (Amendment) Act, 2018 and Goods and Services Tax (Compensation to States) Amendment Act, 2018, it has not been notified. Therefore, in the absence of implementation of Section 43A of the respective GST enactments during the period in dispute, there was no scope for imposing restriction in availing the Input Tax Credit (ITC) under Rule 36(4) of the respective GST Rules by a registered person like the Petitioner.

It was also submitted by the learned counsel for the Petitioner that once a registered person satisfies the requirements of Section 16(2) of the respective GST enactments, the Input Tax Credit (ITC) availed by such registered person as specified in the provision are to be allowed.

Arguments of Respondent (GST Department)

It is submitted by the learned Senior Standing Counsel for the Respondents that irrespective of Section 43A of the respective GST enactments, the restrictions can be placed under the Rules in terms of Section 41 of the respective GST enactments.

It is submitted by the Respondents that Rule 36(4) of the respective GST Rules is a benevolent provision in the nature of a concession as it allows credit even in respect of supplies where the invoices or debit notes have not been furnished by the suppliers under Section 37(1) of the respective GST Acts and tax not deposited with the Government.

It is submitted by the Respondents that if not for the impugned Rule 36(4) of the respective GST Rules, in view of the prohibition under Section 16(2)(c) of the respective GST Acts, the recipient of the supply shall not be entitled to take any credit. The allowance of 20%, 10%, and presently 5% of the eligible credit available in respect of invoices or debit notes which have neither been furnished in the returns by the supplier nor the tax deposited with the Government lessens the rigor of the prohibition imposed under Section 16(2)(c) read with Sections 16(1), 41 and 42 of the Central Goods and Services Tax (CGST) Act, 2017.

Learned Senior Standing Counsel also submitted that merely because Rule 36(4) of the respective GST Rules could also be traced to Section 43A of the respective GST Acts when it is notified, it cannot be construed to mean that it could not be traced to Sections 41(1) and 16(1) of the respective GST Acts. Therefore, it is submitted that the impugned Rule 36(4) is intra vires the respective GST Acts.

Analysis of High Court:

Rule 36(4): If the supplier fails to furnish the details in the returns under Section 37(1) of the CGST and respective State GST enactments, restricted credit was allowed. Initially, it was allowed at 20%. Later, it was reduced to 10% and still later it was reduced to 5%. Eventually, no Input Tax Credit (ITC) was to be allowed if the details required under Section 37(1) of the respective GST enactments were not furnished by the supplier of goods and / or service.

It has to be borne in mind that the GST Council as also the Government were aware of the bitter experience under the VAT regime due to ineligible Input Tax Credit (ITC) being passed on and availed on the strength of either fake and / or fictitious invoices.

The experience gained under the initial experiments made under the provisions of the Central Excise Rules, 1944 from the days of implementation of PROFORMA CREDIT to MODVAT CREDIT to CENVAT CREDIT [from mid 1980s to 2004] and under the VAT regime under the various VAT enactments of the States and the experience gained immediately after the implementation and roll out of the GST laws, led the Government to allow restricted credit if there was no compliance by the supplier of the requirement of Section 37(1) of the respective GST enactments.

Insertion of Rule 36(4) into the respective GST Rules in the year 2019 was intended to not only protect the interests of the Government but also the dealers / registered tax payers under the respective GST enactments so that they are not later exposed to recovery proceedings if the tax was not indeed paid by the supplier of goods and / or service.

To allow Input Tax Credit (ITC) without any restrictions is to encourage even ineligible credit being availed which are passed on by
unscrupulous persons by merely obtaining GST registration.

With these thoughts, the court dismissed the writ and held Rule 36(4) of CGST Rules valid.