Himachal Pradesh HC Says Rule 86B Of CGST Rules Limiting Discharge Of Output Tax Liability Through ITC In Electronic Credit Ledger Appears To Be Ultra Vires HPGST Act But Leaves Issue Open

The Himachal Pradesh High Court recently observed that Rule 86B of the Central Goods and Services Tax (CGST/HPGST) Rules, 2017, which restricts use of Input Tax Credit (ITC) in the Electronic Credit Ledger for releasing Output tax, appears to be ultra vires the HP Goods and Services Tax Act 2017.

Rule 86B stipulates that ITC in the Electronic Credit Ledger can be used to discharge 99% of output tax liability. 1% of the output tax liability is to be paid in cash.

Bench of Chief Justice M.S. Ramachandra Rao and Justice Satyen Vaidya said, “We do find force in the petitioner's contention that Rule 86B of the Act has no statutory backing and appears to be ultra vires the provisions of the HPGST Act, 2017.”

Relevant Provisions

Significant to note, Section 49(4) of the Act empowers the GST authorities to impose conditions for utilizing the amount available in the Electronic Credit Ledger for making payment towards output tax.

Similarly, Section 49(5) of the Act provides for the conditions and restriction imposed for utilization of cash available in the Electronic Cash Ledger and the input tax credit available in the Electron Credit Ledger

Sections 49A and 49B of the Act also prescribe conditions for utilization of input tax credit.

The High Court however pointed that there are no conditions or restrictions other than these and that respondent-authority failed to reply to Petitioner's contention that Rule 86B itself is not backed by any statutory provision.

It further added that though Section 164 of the Act enables the Rule making authority to frame Rule 86B or other Rules, however, such Rules must have “backing in the main body of the statute”.

Court also pointed that the amount available in the Electronic Credit Ledger is taxpayer's own money. However, it eventually left the issue open for consideration in an appropriate case.

Petitioner, an enterprise, had challenged the Rule after its GST registration was cancelled for violation of Rule 86B.

Rule 21(g) of the 2017 Rules states that the registration granted to a person is liable to be cancelled if the said person violates Rule 86B for paying short tax in cash.

The High Court found that since the tax liability of the petitioner towards output tax stood discharged, no prejudice was caused to the Respondent-authority.

“It was unnecessary for the respondents to cancel the GST Registration and they could have considered any other penalty which is more proportionate to the violation of law,” it held and allowed the plea.

It relied on Arnab Ranjan Goswami v. Union of India (2020) where the Supreme Court held that “any reasonable restriction on fundamental rights must comport with the proportionality standard, of which one component is that the measure adopted must be the least restrictive measure to effectively achieve the legitimate State aim.”

Court also expressed “shock” at the authority for proceeding to cancel petitioner's GST registration based on a “prima facie” investigation and directed the Respondent to restore petitioner's GST registration forthwith.

It cited Jayrajbhai Jayantibhai Patel v. Anilbhai Nathubhai Patel (2006) where the Supreme Court held that power of judicial review may not be exercised unless the administrative decision “shocks the conscience of the court in the sense that it is in defiance of logic”.

Appearance: Sr. Advocate Vishal Mohan with Advocates Goverdhan Lal Sharma and Praveen Sharma for Petitioner; Advocate General Anup Rattan with Advocate Rakesh Dhaulta, Additional Advocate Generals Sushant Kaprate and Gobind Korla, Deputy Advocate Generals Arsh Rattan, Priyanka Chauhan and Sidharth Jalta

Case title: M/s A.M. Enterprises v. State of Himachal Pradesh & Ors.

Citation: 2024 LiveLaw (HP) 62

Case no.: CWP No.1517 of 2024

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