Kerala HC Strikes Down GST Export Refund Rule: A Judicial Review

Introduction

In Vinayaka Cashew Company v. Union of India[i], the Kerala High Court examined the legality of r. 96(10) of the Central Goods and Services Tax Rules, 2017 (‘Rules’), specifically as it relates to exporters’ rights to claim Integrated Goods and Services Tax (‘IGST’) refunds on zero-rated supplies under the IGST Act, 2017 (‘Act’). The Petitioners, the exporters in the present case, paid IGST on export goods and claimed refunds per s. 16 of the Act, challenged r. 96(10) for unduly restricting their ability to claim such refunds. This case clarifies the interplay between statutory provisions and subordinate legislation and the scope of judicial intervention when regulatory rules exceed statutory limits.

Brief Facts

• The Petitioners were eligible to claim tax refunds under s. 16 of the Act mandates that exports of goods and services be zero-rated, making them eligible for tax refunds.

• R. 96(10) of the Rules, introduced by Notification No. 53/2018 and subsequently amended, imposed a condition restricting IGST refund claims on exported goods or services if the exporter had received supplies that had benefited from specific duty exemptions.

• The Petitioners considered this condition excessively restrictive, especially in cases where even partial use of such exempt supplies led to complete denial of refunds.

• The Petitioners argued that r. 96(10) contravenes s. 16 of the Act and produced arbitrary results, rendering the rule ultra vires.

• Notification No. 20/2024 was issued on 08.10.2024, prospectively deleting r. 96(10). However, this deletion did not retroactively address the scenario wherein previously conducted transactions were denied IGST refunds. Aggrieved by the non-retrospective application of the new notification, the Petitioners filed the present writ petition.

Held

• The Court declared r. 96(10) of the Rules ultra vires to s. 16 of the Act. The court observed that s. 16 guarantees exporters a choice in refund methods without restrictions akin to those in r. 96(10). Therefore, the rule was unenforceable.

• The Court further observed that r. 96(10) was manifestly arbitrary. It imposed sweeping restrictions on the importers and denied IGST refunds even when only a minimal portion of inputs had benefited from specified exemptions. This rule, the Court noted, led to outcomes that were neither logical nor intended by the legislature.

• Consequently, all actions initiated against the Petitioners based on r. 96(10) were quashed, including notices and refund recovery proceedings.

• The Court directed that no attempts should be made to recover refunded IGST for the period from 23.10.2017 to 08.10.2024, based on the invalidated rule.

• Although the 2024 notification removed r. 96(10), the judgment clarified that the rule’s invalidation applied to prior periods, covering refund denials for previous transactions.

Our Analysis

Through this case, the Court has clarified that s. 16 of the IGST Act was designed to ensure a zero-tax burden on exports, a core GST principle for promoting international trade. Further, the Court’s invalidation of r. 96(10) underlines that exporters are entitled to select refund methods without arbitrary limitations, protecting their right to reclaim taxes paid on exports.

This case reinforces that regulatory rule, like r. 96(10), must align with statutory intent, avoiding excessive restrictions on exporters' rights and reinforcing judicial oversight in cases where delegated legislation imposes excessive conditions. The Court’s decision recognizes that fiscal objectives can justify regulatory safeguards, but these must not be applied to the extent of overriding statutory entitlements.

By declaring the rule ultra vires, the Court reinforces its role in promoting fair tax practices under GST, safeguarding exporters' rights to claim tax refunds on zero-rated supplies. This decision strengthens the foundation for transparent and equitable enforcement of tax laws, setting a benchmark for future GST rule interpretations.

End Note

[i] [2024] 167 taxmann.com 760 (Kerala) dated 10.10.2024.

Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.