Is GST an Over-Regulated Law? A Constitutional Examination of ITC Provisions

Introduction

The Goods and Services Tax (GST) regime, since its inception, has been lauded for unifying India’s indirect tax structure. However, its complex compliance framework—particularly concerning Input Tax Credit (ITC) provisions—has often been criticized as excessively restrictive. The question arises: Does GST, especially its ITC provisions, impose unreasonable restrictions on businesses, thereby infringing upon the fundamental right to trade under Article 19(1)(g) of the Constitution?

The Hon’ble Supreme Court has, in several landmark judgments, laid down the principles governing 'reasonable restrictions' under Article 19(6). This article examines whether GST’s regulatory framework meets these constitutional standards.

Constitutional Framework: Reasonable Restrictions Under Article 19(1)(g)

Article 19(1)(g) guarantees citizens the right to practice any profession, or to carry on any occupation, trade, or business. However, this right is not absolute—it is subject to reasonable restrictions under Article 19(6) in the interest of the general public.

The Supreme Court has consistently held that any restriction must satisfy a dual test:

1. It must be 'reasonable' (both procedurally and substantively).
2. It must serve a legitimate public interest (as specified under Article 19(6)).

Let’s analyze key judicial precedents that define these principles.

1. Test of Reasonableness: Balancing Public Interest and Fundamental Rights

In CELLULAR OPERATORS ASSOCIATION OF INDIA AND OTHERS VERSUS TELECOM REGULATORY AUTHORITY OF INDIA AND OTHERS - 2016 (5) TMI 1458 - SUPREME COURT, the Supreme Court held that any restriction on fundamental rights must:

• Be reasonable (not arbitrary or excessive).
• Be in furtherance of a specific public interest (e.g., preventing tax evasion, ensuring revenue neutrality).

Applying this to GST:

• While ITC conditions (e.g., matching of invoices, time-bound compliance) aim to curb fraud, their procedural complexity often hampers genuine businesses.
• The question is whether such restrictions are proportionate to the objective sought.

2. Vested Rights vs. Future Regulations

In UDAI SINGH DAGAR & ORS. VERSUS UNION OF INDIA & ORS. - 2007 (5) TMI 627 - SUPREME COURT, the Court clarified that while the State can impose future conditions (e.g., ITC eligibility criteria), it cannot retrospectively nullify vested rights without justification.

GST Implications:

• Denial of ITC due to minor procedural lapses (e.g., delayed vendor filings) may disproportionately affect taxpayers.
• A balance must be struck between preventing misuse and protecting bona fide claims.

3. Procedural vs. Substantive Reasonableness

PAPNASAM LABOUR UNION VERSUS MADURA COATS LTD. - 1994 (12) TMI 342 - SUPREME COURT laid down that restrictions must be tested on:

• Procedural fairness (e.g., clarity in law, adequate compliance time).
• Substantive fairness (e.g., whether the restriction is excessive relative to the goal).

GST Analysis:

• Procedural Issues: Frequent amendments, complex ITC reversal mechanisms, and technical glitches on the GST portal create compliance burdens.
• Substantive Issues: Blanket ITC denials for minor discrepancies may be disproportionate to the goal of curbing evasion.

4. Striking a Just Balance: The Role of Courts

In RAJASTHAN PRADESH V.S. SARDARSHAHAR AND ORS. VERSUS UNION OF INDIA (UOI) AND ORS. - 2010 (6) TMI 891 - SUPREME COURT, the Supreme Court emphasized that constitutional interpretation must balance conflicting rights.

Relevance to GST:

• While the government has a legitimate interest in preventing tax leakage, excessive compliance demands may stifle business operations.
• Courts must ensure that GST laws do not cross the line from regulation to over-regulation.

5. Common Good vs. Reasonable Restriction

Reiterating Cellular Operators Association, a law must not only serve the common good but also pass the reasonableness test.

GST Context:

• ITC restrictions (e.g., Section 16(2)(c),Rule 36(4)) aim to check fraud but may inadvertently penalize compliant taxpayers.
• A more nuanced approach (e.g., graded penalties instead of outright denial) could better serve equity.

Conclusion: Is GST’s Regulatory Framework Constitutionally Compliant?

While GST’s intent—streamlining taxation and curbing evasion—is laudable, certain provisions, particularly on ITC, may tip into over-regulation. The Supreme Court’s jurisprudence mandates that restrictions must be:

1. Reasonable (not unduly harsh).
2. Proportionate (tailored to the objective).
3. Procedurally fair (clear and feasible compliance).

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Abhishek Raja Ram
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