When the GST System Turns Against You: Challenging Arbitrary State Action Under Article 14

Picture this: your company receives a GST demand for a transaction that was settled two years ago - based on a circular issued last month, applied retrospectively. Or an officer issues a show cause notice with a thirty-day deadline but gives you no hearing, ignores your detailed written reply, and passes an adverse order anyway. Or a notification changes the rules of the game mid-match, with no stated rationale, no warning, and no remedy offered.

These are not hypotheticals. They are the lived reality of thousands of businesses operating under India's GST regime today.

The Constitution of India does not leave you defenceless in such situations. Article 14, the guarantee of equality before law - has emerged as a potent constitutional weapon against arbitrary state action in taxation. Understanding how courts have applied it, and how you can use it, is not merely academic. It could mean the difference between a demand your business absorbs and one it fights - and wins.

Part I: What Is Article 14, and Why Does It Matter to a CFO?

The Constitutional Promise

Article 14 of the Constitution of India states:

"The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India."

For decades, this was read primarily as a protection against discriminatory classification - the state must treat equals equally, and must have a rational basis for treating unequals differently. But the Supreme Court dramatically expanded this protection in Shayara Bano vs Union of India (2017) by importing the doctrine of manifest arbitrariness into Article 14.

The Manifest Arbitrariness Doctrine

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
• Seemingly equal in form, yet producing grossly unfair outcomes

The critical point for tax professionals is this: fiscal laws are not immune . Courts do extend some deference to legislative policy on taxation. But that deference has limits - and arbitrary, unexplained, or punitive state action in GST proceedings crosses those limits regularly.

Part II: The Most Common GST Situations That Attract Article 14 Challenge

1. Retrospective Application of Notifications and Circulars

Retrospective taxation is perhaps the most viscerally unjust form of arbitrary state action. A business makes a decision - on pricing, on structuring a contract, on claiming input tax credit - based on the law as it stood at that time. Months or years later, a notification changes the position and is applied backward.

Courts have been increasingly willing to strike this down.

In Mytrah Energy India Pvt Ltd vs Union of India (Andhra Pradesh High Court, 2026) , the court set aside an assessment order involving a 70:30 tax split for solar EPC contracts. The authority had sought to apply a circular retrospectively to alter the character of the supply. The court held that the authority failed to examine the true nature of supply and that the retrospective application of the circular imposed an unfair burden on the assessee.

Why this matters: EPC contracts, works contracts, and composite supply arrangements are commercially complex. If the GST characterisation of a transaction can be changed retrospectively by a circular, every business operating in this space faces an existential planning risk. Article 14 is the shield.

2. Time Extension Notifications Without Justification

During and after the COVID-19 period, the government issued several notifications under Section 168A of the CGST Act extending limitation periods for assessments and proceedings.

Several of these were challenged and struck down.

The Madras High Court (2025) held that such notifications were ultra vires and arbitrary because:

• They lacked proper force majeure justification as required by Section 168A
• They were issued in disregard of, or inconsistency with, the Supreme Court's own orders on limitation
• The extension of time to assess was being used to revive proceedings that had otherwise become time-barred

This is deeply significant. It means that a demand raised under a limitation period extended by a notification that itself lacked legal basis is vulnerable to challenge - even if you had not objected to the notification when it was issued.

3. Input Tax Credit Restrictions - Rule 96(10) and Beyond

The Kerala High Court examined Rule 96(10) of the CGST Rules, which restricted refund of integrated tax paid on exports where certain benefits had been availed. The rule was held:

• Ultra vires Section 16 of the IGST Act - it went beyond what the parent statute permitted
• Manifestly arbitrary - it produced unjust results that the legislature never intended

This is a recurring pattern in GST: delegated legislation (rules and notifications) that overreaches the parent Act. Where a rule restricts a right - particularly the right to claim ITC or refunds - without statutory backing, it is constitutionally vulnerable.

The principle is straightforward: a subordinate legislation cannot travel beyond the parent statute. Where it does, Article 14 read with Article 265 provides the ground to challenge it.

4. Anti-Profiteering Provisions - Section 171 CGST Act

Section 171 of the CGST Act, which mandates passing on the benefit of rate reductions and ITC gains to consumers, has faced sustained constitutional challenge.

The core objection: the section vests unguided discretion in the National Anti-Profiteering Authority (NAA) to determine whether profiteering has occurred, to quantify it, and to impose penalties. The methodology for calculating "benefit not passed on" is not defined in the statute and varies from case to case.

This is classic arbitrariness: wide powers, no standards, unpredictable outcomes.

Courts have noted these concerns, and the restructuring of the anti-profiteering mechanism itself reflects the pressure of these constitutional arguments.

5. Blocking of Input Tax Credit Without Reasons

Rule 86A of the CGST Rules permits authorities to block a taxpayer's electronic credit ledger if there are "reasons to believe" that ITC has been fraudulently availed. In practice, this provision has been invoked without furnishing reasons to the taxpayer, without an opportunity of hearing, and - in many cases - without any prior show cause notice.

Challenges on the grounds of:

• Violation of natural justice (no hearing, no reasons)
• Article 14 (arbitrary exercise of power)
• Article 19(1)(g) (restriction on right to carry on trade and business)

...have succeeded in several High Courts, with courts directing that reasons must be communicated and the taxpayer must be heard before the credit is blocked.

Part III: The Intersection of Article 14 with Other Constitutional Provisions

Article 265 - No Tax Without Law

Article 265 provides that no tax shall be levied or collected except by authority of law. This works hand-in-hand with Article 14:

• A notification that lacks legislative backing is ultra vires - no valid law authorises the levy
• Even if a law exists, if its application in a specific case is arbitrary or irrational, the collection is constitutionally infirm

The ocean freight levy on the reverse charge mechanism is an example. The Supreme Court in Mohit Minerals Pvt Ltd vs Union of India (2022) struck down the levy of IGST on ocean freight for CIF imports, holding it lacked proper statutory basis and led to double taxation - a classic Article 265 and Article 14 violation.

Article 19(1)(g) - Freedom to Carry on Trade

Arbitrary GST demands, oppressive compliance requirements, and sudden rule changes without transition time operate as de facto restrictions on the right to carry on business. Courts apply the "reasonable restriction" test: even a restriction in the public interest must be proportionate and not excessive.

A retrospective demand that threatens the commercial viability of a contract, or a rule that makes an entire class of transactions unviable without any transition relief, may fail this test.

Part IV: Natural Justice - The Procedural Backbone of Article 14

The Twin Pillars

The principles of natural justice are ancient, but their relevance in GST proceedings has never been greater. They consist of:

• Audi alteram partem - Hear the other side. No order adverse to a party may be passed without giving them a meaningful opportunity to be heard.
• Nemo judex in causa sua - No one shall be a judge in their own cause. Decision-makers must be impartial.

How Natural Justice Violations Manifest in GST

In GST proceedings, natural justice violations are alarmingly common:

• Show cause notices that are vague and non-specific - the taxpayer cannot meaningfully respond because the basis of the demand is not stated
• Personal hearings granted on paper but not actually conducted - the officer passes the order immediately after scheduling a hearing that never takes place
• Replies ignored - detailed factual and legal submissions filed by the taxpayer are not addressed in the order at all
• Time-barred proceedings resurrected - limitation extended by notifications, then used to raise demands the department had otherwise abandoned
• Templated orders - where the same order is passed for hundreds of taxpayers without examining individual facts (a problem familiar from the ROM article as well)

In Suraksha Flexo Packs (in the context of Central Excise, but the principle applies universally), the Tribunal itself struck down a templated order and passed strictures against the adjudicating authority for absence of application of mind. The GST era has its own version of this problem - and courts have been equally unsparing.

The Standard Courts Apply

Courts do not merely ask whether a hearing was formally offered. They ask:

• Was the notice specific enough to allow a meaningful reply?
• Was the reply actually considered, and if rejected, were reasons given?
• Was the final order a reasoned order, addressing the taxpayer's contentions?
• Was there a genuine opportunity to present evidence, or was the process a foregone conclusion?

Where the answer to any of these is no, the order is liable to be set aside on grounds of natural justice - which is inextricably linked to Article 14.

Part V: How Courts Approach GST Arbitrariness - The Judicial Framework

The Standard of Review

Courts do not second-guess policy decisions on taxation. A finance minister's choice to tax one category of goods at 18% and another at 12% is a legislative judgment that courts will not normally disturb.

What courts will intervene in:

• Legislative overreach - where a notification or rule goes beyond the parent statute
• Irrational classification - where similarly situated taxpayers are treated differently without a rational basis
• Unreasoned action - where an authority exercises discretion without recording reasons
• Retroactive prejudice - where a change in law is applied to concluded transactions without adequate justification
• Disproportionate consequence - where the penalty or demand is grossly disproportionate to the default

The Post-Shayara Bano Shift

Before Shayara Bano (2017), the challenge to an arbitrary law required the challenger to show a discriminatory classification . After Shayara Bano, the test expanded: a law or action is now challengeable under Article 14 if it is manifestly arbitrary , even without proving discrimination. This has fundamentally changed the landscape for GST challenges.

You no longer need to find another taxpayer who was treated better. You need to show that the action against you was irrational, capricious, or disproportionate - full stop.

Part VI: A Practical Framework for Finance and Legal Teams

Recognise the Grounds for Challenge

When you receive an adverse GST order, assessment, or notification, ask:

On arbitrariness:

• Is this notification or rule being applied retrospectively to concluded transactions?
• Does the rule or notification exceed the parent statute's authority ?
• Is similarly situated industry being treated differently , without any stated rationale?
• Is the penalty or demand disproportionate to the alleged default?

On natural justice:

• Was the show cause notice specific about the basis and quantum of demand?
• Was there a genuine opportunity to be heard - in writing and in person?
• Does the final order address your reply , or is it silent on your contentions?
• Was the order passed by an officer with the requisite jurisdiction ?

On limitation:

• Is the demand raised within the prescribed limitation period, or under an extension notification?
• Was that extension notification itself validly issued under the statutory conditions?

Build Your Documentation

• Maintain a chronological file of every notice received, every reply sent, and every hearing attended (or denied)
• Preserve the exact text of notifications and circulars in force at the time of the transaction
• Record any change in the departmental position - particularly where the department previously accepted a classification or valuation that it now disputes

When to File a Writ Petition

A writ petition under Article 226 before the High Court is the appropriate remedy where:

• The order violates natural justice - no hearing, no reasons, reply ignored
• The notification or rule is ultra vires the parent statute
• The action is manifestly arbitrary - retrospective, irrational, or disproportionate
• The statutory appeal remedy is inadequate or would cause irreparable harm (e.g., where ITC is blocked and cash flow is at risk)

Do not wait for the appeal process to be exhausted where the constitutional infirmity is evident. Courts have consistently held that constitutional remedies are not ousted merely because a statutory appeal exists, if the action is arbitrary on its face.

Part VII: Quick Reference - Notable GST Challenges and Outcomes

Conclusion: The Constitution Is Your Compliance Framework

There is a tendency among finance professionals to treat taxation as a one-way conversation - the government demands, and the taxpayer pays or appeals through a predefined channel. Article 14 disrupts that assumption.

The Constitution does not merely promise equality in the abstract. It places a positive obligation on every state authority to act rationally, to give reasons, to hear those affected, and to apply the law as it stands - not as they wish it had stood.

For CFOs, finance directors, and tax consultants, the practical takeaway is this: an arbitrary demand is not just unfair - it is constitutionally vulnerable. The tools to challenge it exist. The courts are willing to use them. What is required is the institutional readiness to recognise the grounds, document the facts, and act swiftly.

And this leaves us with a question worth carrying into every boardroom and every tax strategy session:

If your organisation's tax compliance framework is built around what the law says today, is it also built to defend you against what the state might claim - arbitrarily - that it said yesterday?

Because in the era of GST, the answer to that question may well determine who survives a scrutiny and who does not.