Rule 86B restricting use of ITC in the Electronic Credit Ledger for releasing Output tax, appears to be ultra vires, due to no statutory backing

The Himachal Pradesh High Court in this questioned the constitutional validity of Rule 86B of the Central Goods and Services Tax (CGST)/HPGST Rules, 2017, which restricts the use of Input Tax Credit (ITC) from the Electronic Credit Ledger for discharging more than 99% of output tax liability, requiring at least 1% to be paid in cash.

The court found merit in the petitioner’s contention that Rule 86B lacks statutory backing in the HPGST Act, 2017 and appears to be ultra vires. Although Section 49(4) allows the imposition of conditions for the utilization of the Electronic Credit Ledger, and Sections 49A and 49B outline restrictions on the use of ITC, Rule 86B is not explicitly supported by these provisions. The court held that Section 164, which empowers the framing of rules, does not justify Rule 86B without explicit statutory authority.

Further, emphasized that the Electronic Credit Ledger represents the taxpayer's own money, which had already been used to discharge tax liabilities. Given that the tax dues were fully paid, no prejudice had been caused to the authorities. Therefore, it was unnecessary to impose the extreme penalty of GST registration cancellation.

The ruling strongly analysed Rule 86B for being ultra vires the GST Act and questions the authority’s rationale behind cancelling GST registration for ITC usage violations. The ruling emphasized that such penalties must adhere to the proportionality principle and that punitive actions based on incomplete investigations are unjustifiable.

To read the complete judgment 2024 Taxo.online 2211