• Dated 28^th March, 2025

Gauhati High Court Upholds Validity of Rule 36(4) of CGST Rules read with CGST Act,2017

Background of the case:

The petitioner, a registered taxpayer under the CGST Act, has challenged a tax demand and penalty imposed for the alleged incorrect availment of Input Tax Credit (ITC) under Rule 36(4) of the CGST Rules. Rule 36(4) stated that the ITC claimed cannot exceed 5% of the eligible credit against the invoices which were not reported by the supplier. The petitioner contended that Rule 36(4) derives its authority from Section 43A of the CGST Act. However, Section 43A, though inserted into the CGST Act, was never enforced because the Central Government failed to issue the required notification for its enforcement. As a result, Section 43A had no legal force before it was omitted by the Finance Act, effective from October 1, 2022. The petitioner further claims that Rule 36(4) could not have been valid or enforceable before the introduction of Section 16(2)(aa) of the CGST Act on January 1, 2022, which regulates the availment of ITC and is essential for the application of Rule 36(4). Since Section 43A was never enforced and was later repealed, the petitioner argues that Rule 36(4) was legally non-existent and could not serve as a valid basis for imposing the GST demand. Therefore, the petitioner contends that the tax demand and penalty for alleged wrongful availment of ITC under Rule 36(4) are invalid and legally unsustainable.

Held:

The Gauhati High Court addressed several key aspects of the case in its ruling.

• Validity of Rule 36(4): The court noted that Section 43A of the CGST Act had indeed not been enforced until it was omitted by the Finance Act, with effect from 1st October 2022. The petitioner's contention was based on the fact that Section 43A(4) had no operational effect before this date. However, the court clarified that Rule 36(4) was not derived from Section 43A but from Section 16 of the CGST Act, which governs the eligibility and conditions for claiming input tax credit (ITC). Section 16 of the Act provides the necessary legal framework for Rule 36(4), and this rule is intended to prevent fraudulent claims of ITC by imposing restrictions on credit claims that align with the GST returns filed by suppliers. The court acknowledged that while the government had the discretion under Section 2 of the CGST Act to appoint different dates for the enforcement of various provisions, Rule 36(4) itself did not rely on the unimplemented Section 43A(4). Therefore, the court upheld the validity of Rule 36(4), confirming that it was backed by Section 16 and not dependent on Section 43A(4), which had not been enforced prior to its omission in 2022.
• Dismissal of the Petition: Based on the above reasoning, the court dismissed the writ petition. It further pointed out that the challenge to Rule 36(4) seemed to be an attempt by the petitioner to bypass the statutory appeal process outlined in the CGST Act, which the court found to be improper. The court emphasized that taxpayers should follow the statutory processes to challenge tax demands and penalties, rather than, seeking immediate relief through writ petitions. The writ jurisdiction of the High Court is typically invoked when there is no effective alternative remedy available. Since a statutory remedy was available to the petitioner, the court ruled that it was not appropriate to entertain the writ petition.

Comments:

The Gauhati High Court's decision in this case underscores the importance of understanding the legal framework and adhering to statutory processes for challenging GST demands, penalties, and interest. The Court's judgment reinforces the validity of Rule 36(4), which is rooted in Section 16 of the CGST Act, and clarifies that the rule does not depend on the yet-to-be-enforced Section 43A, which was ultimately omitted in 2022. Ultimately, the case serves as a reminder for businesses to exhaust statutory remedies, which are designed to offer a structured approach to dispute resolution under the GST law, rather than resorting to judicial intervention at the initial stage. This ruling solidifies the importance of adhering to the legal framework when dealing with ITC claims and GST disputes.

Author- Aindrila Ghosh