The Allahabad High Court has raised significant questions over the statutory basis for restricting utilisation of Input Tax Credit (ITC) to 99% under Rule 86B of the Uttar Pradesh GST framework, observing that such a restriction may interfere with a taxpayer’s right to discharge tax liability through legitimately earned ITC.
The bench of Justice Saumitra Dayal Singh and Justice Swarupama Chaturvedi questioned whether violation of such a technical requirement could justify the severe consequence of cancellation of GST registration.
The central issue before the High Court concerns the restriction imposed under Rule 86B, under which, subject to prescribed exceptions, a registered person may be required to discharge a portion of output tax liability through cash rather than utilising the entire available ITC.
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The petitioner questioned the statutory backing and rationale for prescribing an upper limit on utilisation of ITC at 99%. According to the submissions recorded by the Court, Section 49(3) of the GST law permits a registered person to utilise the amount available in the electronic credit ledger for payment of tax and other permissible liabilities, without prescribing a percentage ceiling on such utilisation.
The petitioner further argued that the reference to “restrictions” in Section 49(4) could not be interpreted as conferring an unrestricted power upon the State Government to undermine the fundamental mechanism of GST as a value-added tax system based on adjustment of tax paid at earlier stages of the transaction chain.
The High Court also noted the submission that there appeared to be no apparent justification for requiring taxpayers to retain 1% of their ITC and pay the corresponding tax liability through another mode.
The order records the argument that the revenue does not necessarily gain from retaining 1% of the ITC, while the restriction can have a direct impact on the taxpayer’s finances.
The Court observed that restricting the taxpayer’s ability to discharge tax liability through duly earned ITC could compel the assessee to deploy its working capital for payment of tax. This aspect assumes significance because ITC represents tax already embedded in the taxpayer’s business transactions and available for utilisation in accordance with the GST framework.
A particularly important aspect of the proceedings is the Court’s concern over the consequence imposed for the alleged technical violation.
The Bench observed that technical violations should not automatically result in the serious consequence of cancellation of GST registration, particularly where such a consequence has not been expressly created by the statute.
This observation places the proportionality of the action under scrutiny. GST registration is fundamental to a registered business’s ability to conduct taxable transactions, issue tax invoices and avail the statutory benefits attached to registration. Consequently, cancellation can have consequences substantially more serious than the underlying procedural or compliance lapse.
Since the proceedings involve a challenge to the validity of the statutory provision, the Division Bench directed that notice be issued to the learned Advocate General. The Court directed that necessary steps be taken within one week.
The Standing Counsel representing the department was granted four weeks to file a counter affidavit. The petitioner was granted two weeks thereafter to file a rejoinder, if any. The matter is to be listed subsequently.
Pending further consideration of the challenge, the High Court granted significant interim protection to the petitioner.
The Court directed that the operation and effect of the order dated October 18, 2025, cancelling the petitioner’s GST registration, would remain stayed until the next date of listing.
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