• Dated 17^th December, 2024

Himachal Pradesh High Court Strikes Down Rule 86B of CGST/HPGST Rules, 2017 as Ultra Vires

Background of the case:

The Himachal Pradesh High Court recently ruled on the constitutional validity of Rule 86B of the Central Goods and Services Tax (CGST) / Himachal Pradesh Goods and Services Tax (HPGST) Rules, 2017, questioning its legality. Rule 86B restricts the use of Input Tax Credit (ITC) from the Electronic Credit Ledger (ECL) for paying more than 99% of output tax liabilities, requiring at least 1% of the liability to be paid in cash. The court found that this rule lacks statutory backing and is ultra vires (beyond the legal authority) of the HPGST Act, 2017.

Petitioner's Contention:

The petitioner challenged the constitutional validity of Rule 86B on the grounds that it lacks statutory backing under the HPGST Act, 2017. The petitioner argued that while Section 49(4) of the CGST Act permits the imposition of conditions on the utilization of the Electronic Credit Ledger (ECL), there is no explicit provision in the HPGST Act granting authority to impose such a stringent restriction on ITC usage. Further, the petitioner contended that the requirement to pay at least 1% of the output tax liability in cash when ITC is available is unreasonable and not supported by any clear legislative mandate.

Department's Contention:

The department defended the validity of Rule 86B by relying on Section 164 of the CGST Act, which grants the power to frame rules. It argued that the rule was introduced to curb tax evasion and to ensure that taxpayers are not using only ITC for discharging output tax liabilities, thus ensuring compliance with the broader objectives of the GST regime. The department maintained that the restriction imposed by Rule 86B was within the permissible scope of the government's rule-making powers and necessary for preventing misuse of the ITC system.

Court's Analysis:

The court acknowledged that Section 49(4) provides a legal basis for imposing conditions on the utilization of ITC but highlighted that the specific restriction under Rule 86B is not expressly supported by any provision of the HPGST /CGST Act, 2017. The court also noted that Section 164 empowers the government to frame rules, but this power does not extend to creating rules that impose severe restrictions on the use of ITC without a clear legislative mandate. Consequently, the court ruled that Rule 86B is ultra vires the HPGST / CGST Act.

Furthermore, the court emphasized that the Electronic Credit Ledger represents the taxpayer's own funds, which have already been paid to the authorities through earlier tax payments. The imposition of a restriction on ITC usage was found to be unjustified when the taxpayer had already complied with their tax obligations.

The court also addressed the issue of penalties, particularly GST registration cancellation, for violations related to Rule 86B. The court held that such extreme measures were disproportionate, especially in cases where there was no actual harm to the authorities, since the tax dues had already been fully paid. The court criticized the application of harsh penalties based on incomplete investigations and emphasized that such actions should adhere to the principle of proportionality.

Implications of the Judgment:

This ruling has significant implications for the administration of the GST regime. By striking down Rule 86B as ultra vires, the court has effectively questioned the validity of restricting ITC usage in this manner unless it is backed by clear legislative provisions. The ruling serves as an important reminder that any rule imposing restrictions on the use of ITC must have explicit statutory support and should be implemented in a manner consistent with the principles of fairness and proportionality.

Citation: A.M. Enterprises vs. state of Himachal Pradesh & Ors. [2024]hphc,24

Author & Editor: Bhaskar Thakkar