The Kerala High Court has struck down Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, ruling it invalid as it conflicts with Section 16 of the Integrated Goods and Services Tax (IGST) Act and is “manifestly arbitrary.” The decision, delivered by Justice P. Gopinath, stated that Section 16 of the IGST Act does not place any limitations on exporters claiming refunds for taxes paid on input goods and services or on Integrated Goods and Services Tax (IGST) paid on exports.
The Court observed, “The phrase ‘subject to such conditions, safeguards, and procedure as may be prescribed’ in Section 16(3)(a) & (b) of the IGST Act, along with Section 20 of the IGST Act and Section 54 of the CGST Act, does not grant authority to impose restrictions that would effectively remove the rights provided under Section 16 of the IGST Act.”
Background and Legal Context
Under Section 16 of the IGST Act, exporters are entitled to claim refunds on IGST paid on exported goods or on input taxes for goods and services used in producing or providing exported items. Before amendments, Section 16 allowed exporters to claim refunds in two ways:
- By exporting goods or services under bond or Letter of Undertaking (LUT) without paying integrated tax, while claiming unutilized input tax credit for taxes paid on inputs.
- By claiming a refund on integrated tax paid on exports.
For claiming refunds under the LUT method, exporters are required to apply under Rule 89 of the CGST Rules, while claims under the second method are handled through Rule 96.
Rule 96(10) and Amendments
Rule 96(10) has been amended multiple times, and currently, it restricts exporters from claiming refunds if they have availed benefits under certain specified notifications for their inputs. The rule’s broad language means that if an exporter has received benefits on even a few inputs, they are barred from claiming any refund under Rule 96. Exporters argued that this restriction unfairly denies them refunds, sometimes because of benefits claimed in previous consignments or even by different units of the same company.
Additionally, the Court noted that the rule was amended to remove these restrictions from October 8, 2024. However, the Court declared that the rule is unenforceable even for the period before this amendment.
Court Rejects Government’s Argument
The Central Revenue argued that exporters could choose between Rule 89 and Rule 96 based on which option offered greater benefits, noting that Rule 96 allowed for claims on capital goods, unlike Rule 89. However, the Court disagreed, holding that Rule 96(10) attempts to impose a restriction not envisioned by Section 16 of the IGST Act.
The Court’s ruling reinforces that the rights provided under Section 16 of the IGST Act cannot be limited by additional restrictions imposed through rulemaking, ensuring exporters’ access to refunds remains intact.