Kerala High Court Declares Rule 96(10) of CGST Rules Ultra Vires

Introduction

The Kerala High Court recently delivered a landmark judgment, striking down Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, finding it ultra vires to the Integrated Goods and Services Tax (IGST) Act. Justice P. Gopinath held that the rule, which restricted the refund entitlement of exporters, violated the provisions of Section 16 of the IGST Act and was manifestly arbitrary. This ruling has far-reaching implications for exporters seeking tax refunds on input goods and services.

Background of Rule 96(10) of CGST Rules

Rule 96(10) has been a source of confusion and disputes among exporters since its inception. The rule restricts exporters from claiming a refund on integrated tax paid for exported goods if they have availed benefits under specified notifications for their inputs. This essentially meant that exporters who benefited from concessional rates or exemptions under certain notifications were denied refunds, regardless of the scale of benefits utilized. The situation escalated to a point where exporters were denied refunds simply because of historical benefits availed by different branches of the same company in separate locations.

Court's Rationale: Aligning with Section 16 of the IGST Act

The Kerala High Court pointed out that Section 16 of the IGST Act explicitly grants exporters the right to claim refunds on input taxes, without imposing undue restrictions. Section 16 provides two routes for exporters to claim refunds:

1. Export without Payment of Tax: Under a bond or Letter of Undertaking (LUT), exporters can supply goods without paying integrated tax and claim a refund of unutilized input tax credit.
2. Export with Payment of Tax: Exporters can also opt to pay integrated tax at the time of export and claim a refund for the tax paid.

Justice Gopinath highlighted that Section 16 only mentions that refunds would be "subject to such conditions, safeguards, and procedure as may be prescribed." However, Rule 96(10) imposed conditions so onerous that they effectively nullified the rights granted under Section 16.

Ultra Vires Declaration: A Retrospective Move

The High Court held that Rule 96(10) was unconstitutional from its inception, noting that the notification deleting Rule 96(10), effective from October 8, 2024, did not rectify the retrospective harm caused. The Court made it clear that Rule 96(10) is unenforceable even for the period before its deletion, thus providing substantial relief to exporters who were denied refunds under the rule.

The ruling emphasized that Section 16 of the IGST Act, when read with Section 54 of the CGST Act, guarantees exporters the right to claim refunds on input goods and services used in the manufacture or provision of exported goods and services. By imposing additional conditions, Rule 96(10) went beyond the legislative intent, thus making it ultra vires to the Act.

Impact on Exporters: A Positive Step

The judgment is a major victory for the exporting community. It ensures that legitimate refunds are not withheld due to arbitrary conditions imposed by rules that exceed their legal authority. Exporters who were previously unable to claim refunds due to the retrospective application of Rule 96(10) can now expect relief.

This ruling underscores the importance of aligning rules with the legislative intent of tax laws to avoid creating unnecessary hurdles for businesses. For exporters, this means greater liquidity and predictability in tax compliance, crucial for maintaining competitiveness in global markets.

Comparison Between Rule 89 and Rule 96 Refund Claims

The High Court's decision also shed light on the inconsistencies between refund claims under Rule 89 and Rule 96. Under Rule 89, exporters can claim refunds without restrictions related to the specified notifications. In contrast, Rule 96 imposed a complete bar if any benefits were availed, regardless of their extent.

The counsel for the revenue argued that exporters opting for Rule 96 refunds could also claim credits for capital goods, which is not permissible under Rule 89. However, the Court found this differentiation insufficient to justify the sweeping restrictions imposed by Rule 96(10).

Conclusion

The Kerala High Court's decision to strike down Rule 96(10) of the CGST Rules is a crucial step in ensuring fairness and transparency in the tax refund process for exporters. It reiterates the need for tax provisions to align with the larger objectives of tax legislation, avoiding the imposition of restrictive rules that curtail the rights granted by the law itself.