Gujarat HC Strikes Down Rule 96(10), Allows GST Refunds for Exporters Using Duty-Free Schemes

Key Issues:

1.Whether Rule 96(10) of the CGST Rules is ultra vires to Section 16 of the IGST Act and Section 54 of the GST Act.

2. Whether denying a refund to exporters who import certain inputs under duty-free schemes constitutes unjust discrimination and violates Articles 14 and 19(1)(g) of the Constitution of India.

3. Whether the restriction under Rule 96(10) unfairly impacts cash flow for exporters by preventing them from claiming IGST refunds despite paying IGST on their exports.

4. Whether the retrospective application of Rule 96(10) is valid and enforceable in recovering refunds already granted.

5. Whether exporters are entitled to refunds on IGST paid for exports despite availing tax exemptions on certain imported inputs.

Decision/Outcome:

The High Court of Gujarat quashed Rule 96(10) of the CGST Rules and the associated refund rejection orders. The Court held that the rule, as implemented, was discriminatory, arbitrary, and unconstitutional, violating Articles 14 and 19(1)(g) of the Constitution. As a result, exporters were allowed to claim refunds of IGST paid on exports, even if they had availed benefits under duty-free schemes.

Reasoning behind the Decision:

1.Violation of Constitutional Rights: The Court found that Rule 96(10) created an unreasonable classification among exporters and denied legitimate refunds, violating Article 14 (Equality before law) and Article 19(1)(g) (Freedom of Trade).

2. Inconsistency with GST Framework: The GST Act allows exporters to choose between two refund mechanisms—either refund of ITC or refund of IGST paid. Rule 96(10) distorted this choice by blocking one avenue.

3. Disproportionate Impact: The rule disproportionately affected exporters who imported even a small portion of their raw materials under the Advance Authorization scheme, denying them refunds on IGST paid despite not availing exemptions on domestic procurement.

4. Lack of Legislative Authority: The restriction went beyond the scope of Section 16 of the IGST Act and Section 54 of the GST Act, which did not impose such refund limitations.

5. Retrospective Application Invalid: The rule was applied retrospectively, leading to unjust recovery of previously granted refunds, which the Court found legally unsustainable.

6. Policy Objectives Contradicted: GST aims to promote exports by ensuring tax-neutrality, and restricting IGST refunds directly contradicts this fundamental policy.

Impact/Implications of the Decision:

1. Restoration of Exporters’ Rights: Exporters can now claim IGST refunds irrespective of their procurement methods.

2. Precedent for Tax Policy Challenges: This ruling may lead to re-evaluation of GST refund policies affecting exporters.

3. Improved Cash Flow for Exporters: The removal of restrictions on refund claims ensures better liquidity and working capital management for businesses engaged in exports.

4. Policy Alignment with WTO Principles: By allowing refunds, India strengthens its trade competitiveness and aligns with global best practices for export tax neutrality.

5. Possible Future Amendments: The government may consider revising refund mechanisms to ensure clarity and avoid future disputes.

This ruling is a landmark decision reinforcing export-friendly tax policies while ensuring that GST regulations remain within the constitutional framework.

Now we elaborate and analyse the key issue of this case:

Here’s a deeper analysis of the key issues in the Messrs Addwrap Packaging Pvt. Ltd vs Union of India case:

Key Issues:

Legality of Rule 96(10) under GST Law

• The petitioners contended that Rule 96(10) of the CGST Rules is ultra vires to Section 16 of the IGST Act and Section 54 of the GST Act.
• Section 16 of the IGST Act provides two refund mechanisms:

1.Exporters can supply goods/services under a Letter of Undertaking (LUT) and claim a refund of unutilized input tax credit (ITC).

2. Exporters can pay IGST on exports and claim a refund of the tax paid.

• Rule 96(10), however, restricted refunds of IGST if exporters had availed duty-free imports under schemes such as Advance Authorization (AA) or Export Promotion Capital Goods (EPCG).
• The issue was whether this restriction contradicts the broader tax refund entitlement under the IGST Act.
• Rule 96(10) Introduced by  Notification No. 54/2018-CT dated 09.10.2018 for:

“Rule 96(10) of CGST Rules: The persons claiming refund of integrated tax paid on exports of goods or services should not have received supplies on which the supplier has availed the benefit of the Government of India, Ministry of Finance, notification No. 48/2017-Central Tax, dated the 18th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1305 (E), dated the 18th October, 2017 or notification No. 40/2017-Central Tax (Rate) dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1320 (E), dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321 (E), dated the 23rd October, 2017 or notification No. 78/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272(E), dated the 13th October, 2017 or notification No. 79/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1299 (E) dated the 13th October, 2017.”

Now rule 96, sub-rule (10) is omitted, by the  notification no 20/2024 CT dated 08.10.2024

• Violation of Constitutional Rights – Articles 14 and 19(1)(g)
  • Arbitrary Classification: The restriction applied to exporters who imported some inputs duty-free, regardless of the tax paid on other inputs or capital goods.
  • The petitioners argued that Rule 96(10) creates an arbitrary distinction between exporters who import some inputs duty-free and those who procure all inputs domestically.
  • This classification resulted in unequal treatment and discrimination without a reasonable basis, violating Article 14 (Right to Equality).
  • Article 19(1)(g) – Right to Trade: The restriction forced exporters to forego IGST refunds, placing an undue burden on businesses engaged in global trade.
• Impact on Exporters’ Cash Flow and Working Capital
  • GST is designed to be a tax-neutral system, ensuring that taxes are not embedded in export pricing (as exports are zero-rated).
  • Rule 96(10) disrupted cash flow by preventing exporters from reclaiming IGST paid on export transactions, despite the fact that other taxes had been paid on inputs procured domestically.
  • The issue was whether denying IGST refunds would unfairly impact exporters’ liquidity, making Indian goods less competitive in international markets.
• Retrospective Application of Rule 96(10) & Refund Recovery
  • Rule 96(10) was applied retrospectively, meaning refunds already granted were being recovered, impacting past transactions.
  • The petitioners challenged whether such retrospective denial of benefits was legally justified, as businesses had made financial decisions based on earlier legal interpretations.
  • The issue was whether demanding refunds retroactively violated the principles of natural justice and procedural fairness.
• Fundamental Flaw in GST Policy for Export Refunds
  • Rule 96(10) contradicted the core intent of GST, which is to ensure tax neutrality for exports and promote ease of doing business.
  • Instead of preventing double benefits, the rule effectively blocked legitimate refunds even where no improper advantage was taken.
  • The issue was whether the government’s concerns regarding abuse justified imposing blanket restrictions on all exporters.

This case highlighted critical policy misalignments within GST law and led to reaffirming the importance of tax neutrality for exporters.