Madras HC Upholds Validity of GST Rule 36(4), Declares It Neither Ultra Vires Nor Violative of Article 14 [Read Order]

The Madras High Court dismissed a constitutional challenge against Rule 36(4) of the Central and Tamil Nadu Goods and Services Tax ( CGST ) Rules, 2017, confirming its validity and holding that the provision is neither ultra vires the parent GST enactments nor violative of Article 14 of the Constitution.

The petition was filed by L&T Geostructure LLP, which sought a declaration that Rule 36(4), which restricts input tax credit (ITC) if the supplier fails to upload invoice details in GSTR-1 is beyond the scope of the CGST and TNGST Acts and infringes the right to equality.

The Petitions are of the year 2020. When these Writ Petitions were filed, Rule 36(4) of the respective GST Rules read differently from how it read after its amendment with effect from 01.01.2022.

Also read: Auditor’s Advice on Rs. 20L Threshold Resulted in GST Registration Cancellation: Madras HC Orders Reopening of Portal for Return Filing [Read Order]

The petitioner challenged the constitutional validity of sub-rule (4) to Rule 36 of the GST Rules, contending that it imposes arbitrary restrictions on availing ITC which are not envisaged under Section 16 of the CGST and respective State GST Acts.

Rule 36(4) of the GST Rules, introduced on 09.10.2019 and progressively tightened through amendments, initially allowed 20% provisional ITC for unmatched invoices under Section 37(1), which was later reduced to 10%, 5%, and eventually nil; this restriction, though absent before 09.10.2019, is now applicable only if invoice details are not furnished by suppliers in GSTR-1 and reflected in GSTR-2B.

Complete Referencer of GSTR-1, GSTR-1A, GSTR-3B, GSTR-9 & GSTR-9C Click Here

The core argument was that Rule 36(4), inserted through Notification No. 49/2019-Central Tax dated 09.10.2019, is ultra vires the parent legislation as it restricts ITC based on supplier compliance, despite Section 43A, prescribing such mechanisms, never being notified or implemented. The petitioner argued that unless a registered person fails to satisfy the conditions under Section 16(2), including possession of a valid tax invoice and actual receipt of goods or services, ITC cannot be denied merely due to the supplier’s failure to furnish returns under Section 37.

Also read: No Allegation of Suppression or Fraud in GST S. 74 SCN: Madras HC directs to Treat S.74 Notice as S. 73 notice Enabling to Avail Amnesty Scheme[Read Order]

Furthermore, it was submitted that Rule 36(4), introduced under Section 164, cannot be sustained as it lacked recommendation from the GST Council and was not intended to carry out any existing provision of the enacted GST laws, particularly since Section 43A remains unenforced.

The petitioner contended that the rule contravenes Articles 14, 19, and 21 of the Constitution and cited Supreme Court decisions to support the principle that delegated legislation must conform to the parent statute. Hence, Rule 36(4) was sought to be declared as arbitrary, ultra vires, and unconstitutional.

Complete Referencer of GSTR-1, GSTR-1A, GSTR-3B, GSTR-9 & GSTR-9C Click Here

Rejecting these submissions, the Division Bench comprising Justices R. Suresh Kumar and C. Saravanan held that Rule 36(4) is traceable to the rule-making power under Sections 16(1), 41, and 164 of the GST Acts, and does not require a mandatory notification of Section 43A to be enforceable.

Also read: Tamil Nadu Govt Slashes Entertainment Tax from 8.6% to 4% on Request of Kamal Hassan

The Court observed that the restriction in availing ITC in the absence of supplier compliance is consistent with the legislative objective of curbing tax evasion and preventing fraudulent credit claims, which plagued the pre-GST regime.

The bench also noted that ITC is a statutory concession, not a vested right, and its availment can be subject to conditions to protect revenue interest. Rule 36(4), which initially allowed 20% ITC on mismatched invoices and was gradually tightened to nil tolerance, was held to be a reasonable and proportionate measure.

Also read: Allahabad HC Quashes GST Assessment order passed without issuance of notice u/s 46 of GST Act [Read Order]

“Restrictions imposed under Rule 36(4) of the respective GST Rules to avail full credit of Input Tax in absence of the mandatory compliance by the supplier of goods or service as is contemplated under Section 37(1) of the respective GST Acts was a temporary measure to regulate the availing of Input Tax Credit (ITC). Ipso facto, it cannot be held that Rule 36(4) of the respective GST Rules is in violation of Article 14 of the Constitution of India” observed the court.

The court also added that “In any event, as mentioned above, the temporary deprivation of full ITC has now been resolved with the implementation of Form GSTR 2A vide Notification No. 79 dated 15.10.2020. Thus, the issue had also become academic at this distant point of time as the IT system has evolved. It enables the recipient to avail Input Tax Credit (ITC) on the strength of informations reflected in Form GSTR 2A inserted vide Notification No.79 dated 15.10.2020.”

Accordingly, the Madras High Court upheld Rule 36(4) as intra vires and constitutionally valid, dismissing the writ petitions filed by the petitioner.

Also read: GST ITC denied on Non-Compliance of Circular: Madras HC grants Hearing Opportunity Conditionally [Read Order]

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates