Input tax credit restriction upheld as a valid GST compliance measure against misuse and revenue leakage.

Rule 36(4) of the CGST Rules and the Tamil Nadu GST Rules, which restricted availment of input tax credit where the supplier had not furnished outward supply details, was upheld as a valid regulatory measure within the GST scheme. The Madras HC held that input tax credit is subject to statutory conditions and restrictions under Section 16, read with the matching and return-filing framework in Section 37 and the rule-making power in Section 164. The restriction was aimed at preventing bogus credit, circular trading and revenue leakage, and was neither arbitrary nor unconstitutional. The challenge under Article 14 failed, and the rule was held intra vires for the period in question.

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Issues: Whether Rule 36(4) of the Central Goods and Services Tax Rules, 2017 and the Tamil Nadu Goods and Services Tax Rules, 2017, which restricted availment of input tax credit where the supplier had not furnished outward supply details, was ultra vires the parent GST enactments and violative of Article 14 of the Constitution of India.

Analysis: The rule was examined in the context of the scheme of input tax credit under Section 16, the matching and return-filing architecture under Section 37, and the rule-making power under Section 164 of the GST enactments. The restriction was treated as a temporary regulatory measure designed to curb bogus or ineligible credit, circular trading, and revenue leakage, while still allowing limited credit where supplier compliance was incomplete. The Court held that input tax credit under the GST framework is subject to conditions and restrictions prescribed by law, that the impugned rule operated within the legislative scheme, and that the classification and restriction were neither arbitrary nor unconstitutional. The Court also noted that the system had later evolved, but that did not render the rule invalid for the period in question.

Conclusion: Rule 36(4) was held to be intra vires the GST enactments and not violative of Article 14; the challenge failed.

Ratio Decidendi: A rule restricting input tax credit, when enacted within the statutory scheme of prescribed conditions and restrictions and aimed at preventing misuse and revenue leakage, is valid if it operates as a reasonable and temporary regulatory measure and is not shown to be arbitrary or beyond the parent Act.

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