GST System: Challenging Arbitrary Action

The issue of Arbitrary Action, GST Refund, and their implications on businesses under India’s GST regime has become a pressing concern, with thousands of businesses facing existential planning risks due to retrospective taxation and arbitrary state action. The Constitution of India, particularly Article 14, guarantees equality before the law and has emerged as a potent constitutional weapon against such arbitrary state actions. Understanding how courts have applied Article 14 and how businesses can use it to challenge arbitrary GST demands is crucial for navigating the complexities of the GST regime.

Key Facts

• Article 14 of the Constitution of India guarantees equality before the law and equal protection of the laws.
• The Supreme Court’s judgment in Shayara Bano vs Union of India (2017) expanded the protection under Article 14 by introducing the doctrine of manifest arbitrariness.
• Key cases include Mytrah Energy India Pvt Ltd vs Union of India (Andhra Pradesh High Court, 2026), Section 168A Notifications (Madras HC, 2025), Rule 96(10) CGST Rules (Kerala HC), and Ocean Freight – CIF Imports (SC, 2022).
• Relevant sections and rules include Section 16 of the IGST Act, Section 168A of the CGST Act, Rule 96(10) of the CGST Rules, and Rule 86A of the CGST Rules.
• The GST rates and limitation periods are critical in determining the validity of GST demands and the applicability of Article 14.

Statutory Context & Tax Analysis

Article 14 of the Constitution of India states that "The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." This article has been interpreted to mean that the state must treat equals equally and must have a rational basis for treating unequals differently. The doctrine of manifest arbitrariness, introduced by the Supreme Court in Shayara Bano vs Union of India (2017), holds that a law or executive action is manifestly arbitrary if it is irrational, capricious, or whimsical, passed without any adequate determining principle, excessive or disproportionate to the object sought, or seemingly equal in form yet producing grossly unfair outcomes.

In the context of GST, Article 14 has been used to challenge arbitrary GST demands, including retrospective taxation, input tax credit restrictions, and anti-profiteering provisions. The GST Act and rules, such as Section 16 of the IGST Act and Rule 96(10) of the CGST Rules, must be examined in light of Article 14 to determine their validity and applicability.

Client Impact & Compliance Procedure

Businesses must be aware of the potential risks and challenges associated with arbitrary GST demands and take proactive steps to protect themselves. This includes maintaining accurate records, documenting every notice received and reply sent, and preserving the exact text of notifications and circulars in force at the time of the transaction.

To challenge an arbitrary GST demand, businesses must recognize the grounds for challenge, including arbitrariness, natural justice, and limitation. They must build their documentation, including a chronological file of every notice received and every reply sent, and record any change in the departmental position.

Businesses must also be prepared to file a writ petition under Article 226 before the High Court, where the order violates natural justice, the notification or rule is ultra vires the parent statute, or the action is manifestly arbitrary. The statutory appeal remedy may not be adequate, and irreparable harm may be caused if the demand is not challenged promptly.

In terms of practical compliance procedures, businesses should:

1. Maintain accurate and detailed records of all GST transactions, including invoices, receipts, and payment vouchers.
2. Document every notice received and reply sent, including the date and time of receipt and response.
3. Preserve the exact text of notifications and circulars in force at the time of the transaction.
4. Record any change in the departmental position, particularly where the department previously accepted a classification or valuation that it now disputes.
5. Recognize the grounds for challenge, including arbitrariness, natural justice, and limitation.
6. Build their documentation and be prepared to file a writ petition under Article 226 before the High Court, where necessary.

By following these steps and being aware of the potential risks and challenges associated with arbitrary GST demands, businesses can protect themselves and ensure compliance with the GST regime.

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