Protection of Vested Input Tax Credit: Supreme Court Bars Retrospective Reduction

1. Introduction

The Supreme Court of India, in the matter of The State of Punjab v. Trishala Alloys Pvt. Ltd. (2025 INSC 231) along with connected appeals, has delivered a significant ruling on the scope of delegated legislation under the Punjab Value Added Tax Act, 2005 (“Punjab VAT Act”), particularly concerning retrospective changes to Input Tax Credit (“ITC”). The State of Punjab sought to reduce ITC on existing stocks of iron and steel goods after lowering the tax rate on these goods. The core question revolved around whether Rule 21(8) of the Punjab Value Added Tax Rules, 2005 (“Punjab VAT Rules”)—introduced before a corresponding amendment in the parent statute—could legitimately diminish accrued ITC on pre-existing stock.

The Respondent, Trishala Alloys Pvt. Ltd. (along with other similarly placed entities), challenged the State’s move to deny or reduce ITC that had already vested when the goods were originally purchased, paying tax at a higher rate. After a comprehensive analysis, the Court dismissed the State’s appeals, confirming that rights already vested under existing law cannot be curtailed or taken away by a subsequent amendment lacking proper statutory sanction.

2. Summary of the Judgment

In essence, the Supreme Court held that Rule 21(8) of the Punjab VAT Rules—introduced with effect from February 1, 2014—could not operate to reduce ITC on goods that were purchased before that date at a higher rate. Although the legislative amendment to the Punjab VAT Act (amending Section 13(1) and its Proviso) came into force from April 1, 2014 and permitted such a change on a prospective basis, that amendment could not be used retroactively to deprive dealers of ITC already earned.

The High Court’s decision, which deemed that Rule 21(8) was invalid in the period between its notification (January 25, 2014) and the date the corresponding statutory amendment took effect (April 1, 2014), was upheld. The Supreme Court emphasized that a vested right once accrued (to claim ITC at the rate in effect when the goods were purchased) cannot be clawed back unless there is express statutory authority, and even then, such authority must be prospective unless expressly stated otherwise.

3. Analysis

A. Precedents Cited

The Supreme Court relied on several landmark rulings that examine the impermissibility of retrospectively impairing rights without explicit legislative authorization:

1. Eicher Motors Limited v. Union of India (1999) 2 SCC 361: The Court held that credit of duty paid on inputs is a benefit that accrues as soon as tax is paid on raw materials. Such a vested right cannot be taken away by a rule that retrospectively alters this entitlement unless the enactment clearly supports such retrospective application.
2. Sedco Forex International Drill INC. v. CIT (2005) 12 SCC 717: Affirmed the principle that the law applicable is the one in force during the relevant assessment year except where the legislature explicitly provides otherwise. If a provision clarifies existing law, it may be read retrospectively; if it changes the law to the detriment of the taxpayer, it is presumed prospective.
3. Commissioner of Central Excise, Patna v. New Swadeshi Sugar Mills (2016) 1 SCC 614: The Court clarified that any rule that takes away credit already earned or imposes a new obligation not sanctioned by law must be prospective only, lest it upset settled expectations.
4. Jayam and Company v. Assistant Commissioner (2016) 15 SCC 125: The Court reaffirmed that a statutory amendment reducing the rate of ITC on resale cannot override a vested right that accrued under the previous regime.

These cases form the backbone of the Supreme Court’s reasoning, illustrating the consistent judicial stance against retroactive curtailment of rights that have already vested under prior law.

B. Legal Reasoning

The Supreme Court began its analysis by reviewing the provisions of the Punjab VAT Act, 2005, especially Section 13, which outlines the concept of Input Tax Credit (“ITC”). Under the unamended first proviso to Section 13(1), a taxable person was entitled to ITC on goods purchased for resale or manufacture, provided the goods were “for sale” or “for use” within the State.

Thereafter, by virtue of the Punjab Value Added Tax (Second Amendment) Act, 2013, effective April 1, 2014, the statutory text changed from “goods are for sale” to “goods are sold” and from “for use in the manufacture” to “are used in the manufacture.” This shifted the point of eligibility for ITC such that it only arose when the goods were actually sold or used post-April 1, 2014.

Prior to this statutory amendment, however, the State had—on January 25, 2014—issued a notification inserting sub-rule (8) in Rule 21, stating that if the tax rate on certain goods was reduced with effect from a particular date, only that lower rate would be allowed as ITC on any sales or further use after that date, even if the actual purchase had occurred at a higher rate of tax. According to the Court, there was no statutory basis in the Punjab VAT Act, as it then stood, to enable the State to create a rule that truncated ITC already accrued on goods bought at a higher tax rate.

The Court highlighted:

• Lack of Statutory Authority (Pre–April 1, 2014): No provision in Section 13(1) (prior to amendment) authorized restricting ITC to the reduced tax rate for inventory purchased earlier at a higher rate.
• Delegated Legislation Limits: While Section 70(2) gave the State power to issue rules with prospective or retrospective effect in the public interest, such rules must not override or contradict the parent Act. Before April 1, 2014, the parent statute did not permit the partial reduction of previously vested ITC simply because the State had reduced the tax rate.
• Retrospective Implication: The Court underscored that taking away already vested ITC amounts to a “retroactive” measure, which requires unequivocal legislative sanction. A mere rule or notification cannot achieve this if the main Act is silent or was differently worded at the time.

Conclusively, the Court endorsed the High Court’s view that sub-rule (8) to Rule 21, introduced on January 25, 2014, could only have effect from April 1, 2014 onwards, after the enabling statutory amendment became operative.

C. Impact

This decision carries several important implications for dealers, taxation authorities, and the broader legislative process:

• Vested Rights Doctrine: Taxpayers who paid tax on goods at a certain rate retain the associated ITC based on that earlier rate unless a valid law explicitly and prospectively modifies that right.
• Legislative Clarity: Governments must align subordinate or delegated legislation (rules and notifications) strictly with the prevailing statutory framework. An amendment in rules cannot retrospectively reduce accrued financial benefits without clear parent statutory authority.
• Future Lawmaking: Legislatures and administrations may need to specify explicit transition provisions or “sunset” clauses if they want to place new constraints on rights or entitlements that have already crystallized.
• Protection for Dealers: Businesses can rely on the principle that changes to tax laws, particularly those affecting investment and operations decisions, generally cannot be imposed retroactively unless expressly and validly stipulated—thus affording certainty and stability.

4. Complex Concepts Simplified

Below are brief explanations of key legal and tax concepts referenced in the judgment:

1. Input Tax Credit (ITC): This is the credit a dealer (or taxable person) can claim for the Value Added Tax (“VAT”) already paid on goods or materials at the time of purchase. ITC is meant to prevent the cascading effect of tax by allowing the tax collected at one stage to be offset against liability at the next stage.
2. Rate of Tax: Each good may attract a different tax rate. A reduction in rate by the government means that when the dealer eventually sells or uses these goods in manufacturing, less tax is charged—and, therefore, a smaller credit might be relevant for subsequent transactions if the law allows.
3. Vested Right: A “vested right” is a right so completely and definitely possessed that it cannot be impaired or taken away without the holder’s consent—or, in taxation matters, without explicit statutory deviation. In this context, once tax has been paid and ITC entitlement has accrued, that right is “vested.”
4. Retrospective Legislation: A law is said to be retrospective or retroactive when it applies to events that took place before the law’s enactment. This generally requires clear legislative wording due to its significant impact on previously established rights and obligations.
5. Rule-making Authority: Under Section 70 of the Punjab VAT Act, the State government can make rules to effectively administer the provisions of the Act. However, such rules must not conflict with or exceed the scope of the parent statute.

5. Conclusion

The Supreme Court’s judgment in State of Punjab v. Trishala Alloys Pvt. Ltd. reaffirms the well-established legal doctrine against retrospective imposition of burdens or reduction of accrued rights—especially in the realm of taxation. Unless the legislature has unequivocally provided for it, a vested right such as already accrued ITC cannot be curtailed by subordinate rules.

In sum, the Court’s ruling delivers crucial clarity for taxpayers and governments alike: any attempt to tinker with an established statutory benefit—like ITC—must be anchored in explicit legislative sanction. By upholding the High Court’s reasoning, the Supreme Court ensures that unforeseen rule-making cannot upset settled expectations and rights, thereby promoting stability, fairness, and predictability in the tax regime.