INTRODUCTION

The implementation Goods and Services Tax (GST), the hope was to unify the tax system, cut down on inefficiencies, and make exports more competitive in the global market. But, as with many sweeping reforms, the journey from policy to practice had its complications. One such complication—Rule 96(10) of the Central Goods and Services Tax Rules—sparked significant controversy and hardship for exporters operating under various duty-free schemes.

Introduced as an anti-abuse measure, Rule 96(10) was framed to prevent “double benefits” under the IGST refund mechanism. But in practice, it inadvertently punished genuine exporters, created financial strain for export-oriented units (EOUs), and led to protracted litigation. While the rule was ultimately deleted in 2024, its prior enforcement left a trail of unresolved refund claims and pending notices—raising critical questions of legality, constitutional validity, and administrative fairness.

In a pivotal judgment, the Gujarat High Court offered much-needed clarity by quashing show-cause notices and refund denials issued under the now-abolished rule.

1. ORIGIN OF RULE 96(10): OBJECTIVES AND OPERATIONAL IMPACT

Rule 96 of the CGST Rules governs the procedural framework for claiming refunds of IGST paid on exported goods or services. In 2018, sub-rule (10) was introduced with the stated objective of curbing misuse of the refund mechanism by restricting exporters who availed benefits under schemes like Advance Authorisation, EPCG, and DFIA from simultaneously claiming IGST refunds.

The logic was simple on paper: exporters should not be allowed to enjoy both duty-free imports and IGST refunds, which the government considered a form of double advantage. However, this interpretation failed to distinguish between inputs actually used under duty-free schemes and those procured via regular taxable channels. This lack of nuance led to widespread application of the rule, even in cases where refund claims were entirely legitimate.

2. EFFECT ON EXPORTERS

Exporters affected by Rule 96(10) found themselves in a bureaucratic deadlock. Their refunds were either denied or clawed back, not because of fraudulent practices, but simply because they had used permissible schemes to reduce import duty costs. The IGST paid on their export invoices—often voluntarily to claim faster refunds—was blocked, leading to significant working capital disruptions.

In practical terms, this meant that small and mid-sized exporters, particularly those in textiles, pharmaceuticals, and engineering goods, were forced to operate with constrained liquidity. The burden was especially heavy for MSMEs who lacked the resources to navigate prolonged litigation.

3. DUTY FREE SCHEMES vs. ZERO- RATED EXPORTS

At the heart of the Rule 96(10) conflict lies a deeper tension between India’s export promotion schemes and the GST framework's treatment of exports as zero-rated. Under Section 16 of the IGST Act, exports are not to be taxed, and all related input taxes are to be refunded. Simultaneously, duty-free schemes have existed for decades under Foreign Trade Policy to enhance global competitiveness.

Rule 96(10) disrupted this policy alignment. Instead of making a nuanced distinction, it broadly penalized exporters who relied on duty-free schemes—undermining the very policy tools meant to make Indian exports globally viable. This contradiction bred confusion among taxpayers and enforcement officers alike.

4. PREVIOUS RULINGS BY THE HON’BLE COURT

Exporters turned to the judiciary for relief. One of the earliest significant rulings came from the Kerala High Court in Sance Laboratories Pvt. Ltd. v. Union of India, where the Court struck down Rule 96(10) as being ultra vires the parent legislation. The Court held that the rule could not override the substantive right to refunds granted under Section 16 of the IGST Act.

Other High Courts, including those in Gujarat, Uttarakhand, and Allahabad, heard similar challenges. Petitioners argued that Rule 96(10) had no statutory basis, failed the test of reasonableness under Article 14, and violated principles of natural justice due to its indiscriminate application.

5. GOVERNMENT’S DELETION OF RULE 96(10) IN 202

In October 2024, the Ministry of Finance deleted Rule 96(10) through Notification No. 20/2024-Central Tax. While this came as a major relief, the notification did not contain any saving clause. Consequently, it remained unclear whether pending refund denials or ongoing recovery proceedings could continue under the now-abolished rule.

The lack of clarity prompted fresh litigation. Exporters questioned whether the government could continue proceedings under a rule that had been retrospectively withdrawn without legal preservation of its effects.

6. GUJRAT HIGH COURT’S INTERVENTION (M/s Addwrap Packaging Pvt. Ltd. v. Union of India).

A few months later, the Gujarat High Court delivered its decisive ruling in M/s Addwrap Packaging Pvt. Ltd. v. Union of India. The Court firmly held that:

Deletion is Effective and Eradicative

Citing Supreme Court precedent (Kolhapur Canesugar Works), the omission of a rule without a saving clause results in its legal extinction. Thus, all proceedings—pending or initiated—under Rule 96(10) must cease, including show-cause notices and recovery actions.

Procedural Integrity Overlaid

Rather than wading into constitutional arguments, the Gujarat High Court took a more practical approach. It treated the rule’s deletion as final and unequivocal, making it clear that no further proceedings could be based on something that no longer existed.

Clarity on Scope

Importantly, Gujarat’s judgment applied to all actions post-Oct 8, 2024. Cases prior to deletion may need fresh challenges—but Gujarat settled the law for ongoing proceedings.

7. ULTRA VIRES Statutory: LIMITS OF DELEGATED LEGISLATION

The entire controversy spotlighted a critical issue in Indian administrative law: the limits of delegated legislation. Rule 96(10) was a classic example of subordinate legislation overstepping the authority granted by the parent statute.

Section 16 of the IGST Act clearly provides the right to refund on zero-rated supplies. A rule that overrides this statutory right cannot stand unless explicitly empowered by the law. This principle of ultra vires formed the backbone of many judicial challenges.

9. COMPLIANCE IMPLICATIONS

With the rule now deleted and courts granting relief, exporters can claim long-denied refunds. This decision is expected to unlock thousands of crores in working capital. For MSMEs, the judgment provides financial oxygen and restores confidence in the tax system.

From a compliance standpoint, it also simplifies refund procedures. Exporters no longer need to navigate conflicting interpretations of whether they fall afoul of Rule 96(10).

10. LEGAL REMEDIES FOR EFFECTED EXPORTERS POST JUDGEMENT

Exporters impacted by Rule 96(10) now have a strong legal footing to reclaim their refunds. They can challenge past show-cause notices and even seek interest for delayed payments under Section 56 of the CGST Act by moving High Courts through writ petitions.

Legal practitioners are advising clients to compile records, file revised refund applications, and formally cite the Gujarat and Kerala High Court judgments.

11. ANALYSIS

This underscores the importance of stakeholder consultation and legislative coherence. Rules that diverge from statutory intent not only hurt compliance but also flood the judiciary with avoidable litigation.

As India aims to simplify GST further, policymakers must ensure that delegated legislation respects both legal boundaries and economic realities.

12. CONCLUSION

Rule 96(10) serves as a cautionary tale: even laws made with the best intentions can end up hurting those they were meant to protect if not carefully implemented. The Gujarat and Kerala High Court judgments have restored legal certainty and affirmed that justice in taxation must go beyond technicalities.