Validity of Section 16(2)(c) and 16(4) of CGST Act determined in a recent Kerala HC Judgement

M/S M.TRADE LINKS & 9 Ors. v. Union of India & Ors. [WP (C) No. 31559 of 2019]

The Hon'ble Kerala High Court in this judgment has clubbed multiple writ petitions dealing with the same matter, i.e., challenging Section 16(2)(c) and Section 16(4) of the CGST Act, 2017.

In this case, the HC has discussed the following questions in detail:

• Which factors make a taxing statute unconstitutional?
• What is the nature of the claim to input tax credit under the GST Act and the rules made thereunder?
• Whether Section 16(2)(c) and Section 16(4) of the CGST Act contravene the constitutional provisions?

With respect to Question 1, i.e., parameters for validating the vires of a taxing statue, HC discussed the following:

• The parameters that test the validity of the taxing statute are: first, the legislature imposing it is competent enough; second, it is for the public purpose; and third, it does not violate the fundamental rights guaranteed by Part III of the Constitution.
• It is well recognized that a legislature does not have to tax everything in order to tax something. If reasonably done, it can pick and choose districts, objects, persons, methods, and even rates of taxation. Therefore, making any demarcation in the said aspect, irrespective of the quantum of benefit varying between persons, would not make the taxing statute invalid.
• The power to levy taxes is a sovereign power controlled only by the Constitution, and any limitation on that power must be express. Unless and until the Court finds or arrives at a conclusion that the Constitution itself has expressly prohibited legislation on the subject, either absolutely or conditionally, the power of the central or state to enact legislation within its legislative competence is a plenary power.

Alluding to various decisions and discussions and considering the power granted under Article 246A of the Constitution, the HC stated that both central and state legislation have the power to enact the CGST/SGST Act, and the Constitution prescribes no limitation for enacting such legislation. Therefore, these legislations are valid.

With respect to Question 2, i.e., the nature of the claim related to ITC under GST, the HC discussed the following:

• The claim to input tax credit is not an absolute right, but it can be termed an entitlement; however, the entitlement is subject to conditions and restrictions as envisaged in the provisions of the GST Act and corresponding Rules made thereunder.

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Conclusion

Although the learned counsels for the petitioners contended that Section 16(1) of the GST Act provides an absolute right to claim input tax credit, which cannot be taken away by way of conditions in Section 16(2) of the CGST Act, However, HC held that ITC is in the nature of a benefit or concession extended under the statutory scheme, and the rule-making authority is empowered to provide for abridgement or curtailment while extending a concession. Thus, the ITC claim shall be allowed subject to the conditions and restrictions envisaged in Sections 16(2) of the CGST Act.

With respect to Question 3, i.e., vires of Section 16(2)(c) and Section 16(2)(4) of the CGST Act, the Court discussed the following:

• GST is a destination-based consumption tax with ITC available on payment of tax on supply of goods or services at each stage, which can be availed in the next stage of the supply chain, thereby removing the cascading effect. The same is true irrespective of the destination, be it an intra-state or inter-state supply.
• The input tax credit plays a major role in determining tax collection. Thus, consideration of tax credits at such a large scale cannot be allowed to linger on indefinitely, which would have a direct effect on tax collection, estimates, budgetary allocations, and, in turn, the revenue deficit.
• Section 53 of the CGST Act states that the statutory obligation of the central and state governments is prescribed with respect to the transfer of credit. Considering a scenario without Section 16(2)(c) of the CGST Act, where a supplier in the originating state defaults in payment of tax and the recipient supplier is allowed to take credit based on their invoice, the originating state government will have to transfer the amounts it never received in the tax period in a financial year to the destination state, causing losses to the tune of several crores in each tax period, thus rendering the whole GST law unworkable.
• Further, drawing a comparison between the provisions applicable post-amendment, i.e., w.e.f. 01.01.2022, and the period prior to that, the HC (realizing the difficulty in the initial stage of the GST era) held that for the period prior to the amendment from 1.01.2022, the petitioner was granted liberty to claim benefit of the two Circulars, namely, Circular No. 183/15/2022-GST dated December 27, 2022, and Circular No. 193/05/2023-GST dated July 17, 2023, to make an ITC claim before the appropriate authority who shall examine the same and process it.
• With respect to the amendment to Section 39 of the CGST Act, which extended the return filing date from September 30 to November 30, the HC held that the amendment being procedural has to be given retrospective effect and, therefore, w.e.f. July 1, 2017, the petitioners who had filed their returns for the month of September on or before November 30 should be allowed ITC if they are otherwise eligible for ITC.
• Also, while interpreting a statute, one has to consider the meaning behind the context and the scheme of the statute. Mere text cannot be read in isolation. Further, Section 16(2) is the restriction on eligibility, and Section 16(4) is the restriction on the time for availing of ITC. These provisions cannot be read to restrict other restrictive provisions, i.e., Sections 16(3) and 16(4). Therefore, the challenge to the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST Act cannot be sustained and is thus rejected.