The object of taxation in GST is supply, which is a much wider concept than manufacture and removal in central excise, or that of sale of goods in State VAT. Consequently, the scope of input tax credit should also be commensurately wider. The law in GST is not conservative to restrict the benefit of input tax credit by any means, especially since the Statement of Objects and Reasons for the Constitution amendment included elimination of cascading effect. The scope of supply is wider enough to cover something more than business, as defined. Moreover, often the specified supplies of goods and services as provided in section 17 of the Central Goods and Services Tax Act, 2017 (hereinafter referred as Act) are used for making taxable supplies, but the credit on such supplies has been restricted. Therefore, every inward supply used in relation to a taxable outward supply should be made eligible for input tax credit. Otherwise, the scheme of input tax credit does not match with the philosophy of GST which unfortunately in the law as it stands is a reality.

Rule 36(4) of the Central Goods and Services Tax Rules (hereinafter referred as ‘Rules’) has been inserted by notification No.49/2019 Central Tax dated 09.10.2019 with effect from 09.10.2019 under section 164 of the Act, which restricts the credit relating to the invoices not uploaded by the suppliers in their form GSTR-1 to the extent of 20% (10% w.e.f. 01.01.2020) of such credit. Further w.e.f. 01.01.2021, said percentage was further reduced to 5%. Now let us see on ground it can be said that the conditions imposed under Rule 36(4) is invalid or bad in law.

Grounds to say that Rule 36(4) was bad in law:

i. Rule cannot override Act:

Section 16(2) of the Act specifies the following conditions which needs to be fulfilled to avail the ITC:

a. should have the possession of tax invoice

b. Received the goods or services

c. Supplier is required to be pay tax on the supplies made

d. Return u/s 39 is required to be filed

a) Clause ‘c’ under such section provides that payment of taxes by the supplier is a condition for availing credit. In this regard, it is important to note that the initial design of the GST law was on the premise that the supplier will upload invoices relating to outward supplies in Form GSTR-1 which would be auto-populated in Form GSTR-3 leading to the payment of taxes. Hence, payment of taxes and uploading the details of outward supplies in Form GSTR-1 meant one and the same.

b) However, due to discontinuance of filing Form GSTR-2 and introduction of Form GSTR-3B for payment of tax, the above proposition does not stay and the payment of taxes and uploading of outward supplies by the supplier are 2 different conditions.

c) Thereby, it can be said that if a condition is added that the credit availing would be dependent on the uploading of the details by the supplier in Form GSTR-1, there is an increase in the scope of the conditions posed by the parent act for the reason that payment of tax is ensured by filing of GSTR-3B and uploading is required in Form GSTR-1, being a different form requiring different details and disclosures.

d) Though section 43A of the Act (New returns) inserted vide CGST Amendment Act, 2018 under sub-section (4) provides for such restriction,

43A(4) The procedure for availing input tax credit in respect of outward supplies not furnished under sub-section (3) shall be such as may be prescribed and such procedure may include the maximum amount of the input tax credit which can be so availed, not exceeding twenty per cent. of the input tax credit available, on the basis of details furnished by the suppliers under the said sub-section.

However, it is to be noted that the said provision was not yet been notified and thereby not effective as on date to enable the rule 36(4) ibid to derive the power.

e) Hence, it cannot be said that the restriction provided vide rule 36(4) ibid is relating to the condition already specified under section 16(2) of the Act and thereby for sure it can be said that the condition imposed under rule 36(4) ibid is an additional requirement which increases the scope of the principal Act and not valid as held in the case of

    • Laghu Udyog Bharati And Anr vs Union Of India And Ors on 27 July, 1999 – Supreme Court.
    • M/s. Indian National Ship Owners [2010 (17) S.T.R. J57 (S.C.).
    • Additional District Magistrate (Rev.) Delhi Administration v. Shri Ram – AIR 2000 SC 2143
    • State of Karnataka and Another v. H. Ganesh Kamath etc. – AIR 1983 SC 550

ii. Condition impossible to comply need not be fulfilled:

a. All the conditions except (c) i.e. ”Supplier is required to be pay tax on the supplies made” are in the hands of the recipient to comply, but payment of tax by the supplier is not so. Its compliance is dependent on the behavior of the supplier and is not under the control of the recipient. The GSTN does not provide any facility for verification of this suppliers compliance. Thereby it can be said that the condition (c) is impossible to perform and it is a known principle that the law does not compel a person to do something which he cannot possibly perform as the legal maxim goes: lex non-cogit ad impossibilia, as was held in the case of:

  • Indian Seamless Steel & Alloys Ltd Vs UOI, 2003 (156) ELT 945 (Bom.) (relevant extracts attached as Annexure 21)
  • Hico Enterprises Vs CC, 2005 (189) ELT 135 (T-LB). Affirmed by SC in 2008 (228) ELT 161 (SC) (relevant extracts attached as Annexure 22)

b. Thereby it can be said that the condition which is not possible to satisfy may not be satisfied and treated as deemed satisfied.

c. Further, the validity of section 16(2)(c) was challenged in LGW Industries Limited v. UOI WP 23512/2019 before Calcutta HC and in Bharati Telemedia v. UOI WP (c) 6293/2019 before Delhi HC which were accepted. On similar lines, the condition imposed by rule 36(4) ibid is not under the control of the recipient and hence can be said to be a condition which is impossible to be fulfilled by the recipient and thereby not requiring compliance.

iii. Constitutional validity:

The restriction of credit due to non- filing of Form GSTR-1 by the supplier is violating the following articles of the Constitution of India (hereinafter referred as ‘CoI’)

a. Article 14 of the CoI:

Equality is one the magnificent corner stones of the Indian democracy. Article 14 guarantees to every person the right to equality before the law or the equal protection of the laws. Application of the same laws uniformly to all of them will, therefore, be inconsistent with the principal of equality. To avoid that situation laws must distinguish between those who are equals and to whom they must apply and those who are different and to whom they should not apply. Article 14 forbids class legislation; it does not forbid classification or differentiation which rests upon reasonable grounds of distinction.

The varying needs of different classes of persons require different treatment. In order to pass the test for permissible classification two conditions must be fulfilled, namely:

The classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and

The differentia must have a rational nexus with the object sought to be achieved by the statute in question.

Since the revenue is treating the guilty/ abetting purchaser and the bonafide purchaser alike, it can be said that such rule is violating the Article 14 of the CoI. Further, if such rule is considered to be part of the statute then it would result in harassment of honest taxpayers (recipient of goods or services) and putting a premium on dishonest suppliers, who would go scot-free without any action. Further, the 5% ,10% or 20% restriction is arbitrary and without any basis.

b. Article 19(1) (g) of the CoI gives the right to practice any profession, or to carry on any occupation, trade or business.

The Constitution of India has recognized right to trade as a fundamental right under Article 19(1)(g)  which allows citizens “to practice any profession, or to carry on any occupation, trade or business. However, this right is not absolute, and it is subject to reasonable restriction.

Honorable Supreme Court of India in case of Chintaman Rao vs The State Of Madhya Pradeshram … on 8 November, 1950 Supreme Court of India 1951 AIR 118, 1950 SCR 759 Stated that the phrase “reasonable restriction” connotes that the limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive nature, beyond what is required in the interests of the public. The word “reasonable” implies intelligent care and deliberation, that is, the choice of a course which reason dictates. Legislation which arbitrarily or excessively invades the right cannot be said to contain the quality of reasonableness and unless it strikes a proper balance between the freedom guaranteed in article 19 (1) (g) and the social control permitted by clause (6) of article 19, it must be held to be wanting in that quality

In the instant case, the denial of credit by the department will lead to working capital or funds issues for the recipient who has already paid the taxes to the supplier but is denied credit and thereby leading to the closure of the business. Further by no stretch of imagination, restriction of ITC on default made by the suppliers cannot be held as a reasonable restriction. Similar view was held in the case of Indsur Global Ltd Vs UOI 2014 (12) TMI 585 – Gujarat High Court. 

c. Article 300A: No person shall be deprived of his property save by the authority of law

ITC availed under section 16 could be considered as vested right/property as tax was already paid to the suppliers as was held  by Supreme Court in the case of Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd , SC on 11 August, 1999 and withdrawal of such vested rights violates article 300A

iv. Judgments under the earlier laws:

Under the earlier laws there were provisions similar to rule 36(4) ibid which have been held by the Courts as unconstitutional. Some of them are as follows

a. Arise India Limited vs. Commissioner of Trade and Taxes, Delhi – 2018-TIOL-11-SC-VAT was rendered favorable to the assessee. This decision was rendered in the context of section 9(2) (g) of the Delhi Value Added Tax Act, 2004 (“ITC shall not be allowed to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.”) which is a similar provision wherein the credit availment of the recipient is dependent on the action taken by the supplier.

b. M/s Tarapore and Company Jamshedpur v. State of Jharkhand – 2020-TIOL-93-HC-JHARKHAND-VAT: This decision was rendered in the context of section 18 (8)(xvii) of Jharkhand Value Added Tax Act, 2005 similar to the above provision.

The decisions in the above cases would be equally applicable to the present context of rule 36(4) ibid which would not stand.

c. Further, in the case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur Vs. The State of Maharashtra & ORS 2012-TIOL-370-HC-MUM-VAT the Court has held that the Government can put a restriction for availment/refund of credit, there is an allegation of hawala transaction, and it has been stated on affidavit by the State that a number of dealers from whom the petitioner purchased goods are untraceable. Thereby, this case can be distinguished from the bonafide cases and would not be applicable.

v. Legislative intent:

a. Moreover, in this context, it is important to refer para 18.3 of the minutes of 28th GST Council meeting held on 04.08.2018 in New Delhi which stated as follows:

18……………. There would be no automatic reversal of input tax credit at the recipient’s end where tax had not been paid by the supplierRevenue administration shall first try to recover the tax from the seller and only in some exceptional circumstances like missing dealer, shell companies, closure of business by the supplier, the input tax credit shall be recovered from the recipient by following the due process of serving of notice and personal hearing. He stated that though this would be part of IT architecture, in the law there would continue to be a provision making the seller and the buyer jointly and severally responsible for the recovery of tax, which was not paid by the supplier but credit of which had been taken by the recipient. This would ensure that the security of credit was not diluted completely.”

Thereby, it was always the intention of the Legislature that in case of default by the supplier, the department shall first proceed against the supplier but not against the purchaser.

 b. Further, Honb`le Karnataka High Court in a writ petition filed by M/s ONXY Designs Versus The Assistant Commissioner of Commercial Tax Bangalore 2019(6) TMI 941 relating to Karnataka VAT has held that

“It is clear that the benefit of input tax cannot be deprived to the purchaser dealer if the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the selling dealer. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer

c. From the above GST Council minutes and High Court judgment, it can be said that the Department has to first initiate recovery proceeding against such Vendors and cannot deny credit in the hands of the recipient.

iv. Profiteering:

a. Another aspect is that if rule 36(4) ibid is considered to be valid then it would lead to profiteering by the Revenue for the reason that once credit has not been taken by the recipient due to the reason that the invoice is not appearing in Form GSTR-2A/ GSTR-2B and in case if the supplier uploads them after the Sep due date in the next FY, there is no provision for re-availment of credit by the supplier. This would lead to a double loss in the hands of the honest recipient, profiteering for the supplier and the Revenue. This cannot be the intention of any Legislature. Society of Tax Analysis and Research has filed a writ petition before Gujarat HC challenging the constitutional validity of rule 36(4) and the same was accepted.

b. Further, on the above grounds section 43A can also be challenged as being ultra vires and unconstitutional as it is unreasonable, unconscionable and arbitrary and against the scheme and concept of GST.


From the above discussion it can be said that rule 36(4) is not legally valid. The following can be summarized regarding the eligibility of credit in various scenarios in light of the condition under section 16(2)(d) and rule 36(4) ibid.

Scenario ITC eligibility Remarks
Tax paid in Form GSTR-3B and invoices uploaded in Form GSTR-1 by the supplier Eligible  None
Tax paid in Form GSTR-3B but invoices not uploaded in Form GSTR-1 by the supplier Eligible Rule 36(4) is legally not a valid provision.
Tax not paid in Form GSTR-3B but uploaded in Form GSTR-1 by the supplier Eligible It is impossible for the recipient to identify the non-payment of taxes by the supplier
Tax not paid in Form GSTR-1 and not uploaded in Form GSTR-1 by the supplier Eligible It is impossible for the recipient to identify non-payment of taxes and Rule 36(4) is legally not a valid provision.

Acknowledgements to CA Madhukar N Hiregange for vetting this article.

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January 2021