Introduction
The functional test vs statutory bar under GST has emerged as a recurring point of friction in tax litigation. Taxpayers frequently contend that where an expense or activity is functionally connected to business operations, denial of statutory benefits—particularly input tax credit—produces inequitable outcomes. Courts, however, are faced with a more fundamental constitutional question: can judicial interpretation override an express legislative prohibition under GST?
This article examines that precise issue—the limits of judicial interpretation when the GST law clearly withholds a benefit. It does not engage in provision-specific disputes or fact-driven analysis. Instead, it addresses principle: the extent to which purposive or functional reasoning remains permissible once Parliament has consciously enacted a statutory exclusion.
GST is a statute-centric, destination-based tax with minimal scope for equitable adjustment. Judicial interpretation in fiscal law has therefore evolved within defined boundaries, emphasising legislative intent over perceived fairness. Appreciating this discipline is critical not only for litigation strategy, but also for responsible compliance and advisory practice.
The discussion isolates a single proposition: functional analysis may explain commercial reality, but it cannot dilute an express statutory bar under GST.
The Core Issue: Functional Test vs Statutory Bar
At the heart of this debate lies a simple but critical question: when the GST statute clearly prohibits something, can courts still allow it by applying a functional or business-use test?
A functional test examines how an asset, service, or expense operates in the real business environment. It asks whether the item is essential, integral, or economically connected to business activity. Such reasoning has historically played a role in income tax and indirect tax jurisprudence where statutory language was broad or open-ended.
A statutory bar, however, stands on a different footing. Under GST, exclusions are not accidental omissions; they are deliberate legislative choices. When the law expressly states that a benefit “shall not be available”, the interpretative space narrows significantly.
The core issue, therefore, is not about fairness or commercial logic. It is about institutional limits. Courts are empowered to interpret law, resolve ambiguity, and harmonise provisions — but they are not authorised to rewrite fiscal policy under the guise of interpretation.
In GST, once a statutory bar is triggered, functional relevance alone cannot neutralise legislative intent.
The Functional Test in Tax Interpretation
The functional test is a judicial tool used to assess the real character of a transaction by looking beyond form and into its economic and business purpose. Instead of focusing narrowly on labels or structures, courts examine how an asset or service actually functions within the taxpayer’s business. This approach has been particularly useful where statutory language is broad, undefined, or capable of multiple meanings.
In tax jurisprudence, functional interpretation is often invoked to prevent artificial distinctions that defeat commercial reality. It allows courts to align taxation with substance rather than mere form. Over time, this method has been applied in situations involving composite supplies, classification disputes, and questions of business use.
However, fact shows that the functional test is not an independent source of entitlement. It is an interpretative aid, not a legislative override. Its relevance arises only when the statute leaves room for interpretation. Where the law is silent or ambiguous, functional analysis can help ascertain intent. Where the law is explicit, the role of the functional test diminishes sharply.
Under GST, the growing tendency to rely on functional arguments even against express exclusions has created interpretative tension — one that courts must approach with restraint.
Statutory Bars under the GST Framework
A statutory bar under GST represents a conscious legislative decision to deny a benefit, regardless of commercial necessity or business logic. These prohibitions are not exceptions carved out by implication; they are expressly enacted within the statutory framework itself. Their presence signals that Parliament has weighed competing considerations and chosen finality over flexibility.
GST is structured on a clear entitlement–restriction model. While eligibility provisions grant rights subject to conditions, exclusionary provisions withdraw those rights in defined circumstances. Once such a withdrawal is triggered, the statute leaves little scope for interpretative expansion.
As per our experience, disputes often arise because taxpayers treat statutory bars as policy choices open to judicial balancing. This assumption is misplaced. Fiscal statutes operate on certainty, not discretion. Courts have consistently recognised that hardship, inconvenience, or business compulsion cannot dilute explicit prohibitions.
Importantly, statutory bars also serve systemic objectives — revenue certainty, administrative simplicity, and avoidance of subjective litigation. Allowing functional or purposive reasoning to override them would reintroduce uncertainty into a tax designed to be rule-based.
Under GST, therefore, statutory bars function as interpretative stop signs, not mere caution markers.
The Conflict: Functional Test vs Clear Legislative Prohibition
The real conflict arises when courts are asked to choose between commercial logic and statutory command. Taxpayers often argue that denying a benefit, despite its undeniable role in business operations, defeats the purpose of GST as a tax on value addition. This line of reasoning relies heavily on functional analysis — what the transaction achieves rather than what the statute permits.
However, this approach encounters a firm constitutional boundary. When legislative language is clear, interpretation does not involve weighing competing outcomes. The role of the court is confined to giving effect to the law as enacted. Functional reasoning cannot be used to dilute or neutralise an explicit prohibition merely because the result appears harsh or economically inefficient.
Judicial practice indicates that blending functional tests with express statutory exclusions leads to interpretative inconsistency. What begins as purposive interpretation risks transforming into judicial reconstruction of fiscal policy. GST, by design, does not permit such elasticity.
The conflict therefore is not between fairness and rigidity, but between interpretation and legislation. Once Parliament has drawn a line, courts are bound to respect it — even where the functional outcome appears commercially irrational.
Judicial Limits: Where Interpretation Must Yield to Statute
Judicial interpretation operates within well-defined limits, particularly in fiscal legislation. Courts are empowered to resolve ambiguity, harmonise provisions, and ensure constitutional compliance. They are not authorised to re-engineer tax policy or supply omissions under the guise of equity.
A settled principle of tax law is that equitable considerations have no place where statutory language is clear. This principle acquires even greater significance under GST, which is structured as a rule-based system with limited discretionary space. Once a statutory bar is triggered, the interpretative exercise effectively concludes.
Courts have consistently cautioned against reading down clear statutory exclusions merely because they yield inconvenient results. Such an approach blurs the distinction between judicial review and legislative amendment, and undermines certainty—a cornerstone of any indirect tax regime.
In GST, judicial restraint is not a sign of passivity; it is a recognition of constitutional boundaries. Interpretation serves to explain the law, not to substitute it. Where the statute speaks plainly, judicial creativity must yield to legislative clarity.
Why Over-Reliance on Functional Tests Is Risky in GST
Excessive reliance on functional tests introduces uncertainty into a tax framework that is designed to be predictable and rule-driven. GST operates on clearly defined entitlements and exclusions. When functional reasoning is allowed to override express statutory bars, outcomes begin to depend on subjective assessments rather than legislative text.
From experience, such an approach leads to inconsistent positions across jurisdictions. Identical fact patterns may yield different results depending on how broadly a court perceives “business necessity” or “commercial expediency”. This not only increases litigation but also weakens compliance discipline.
Further, functional tests tend to blur the distinction between interpretation and policy correction. GST exclusions often reflect revenue considerations, anti-abuse safeguards, or administrative feasibility. Courts are not institutionally equipped to rebalance these considerations through interpretation.
Most importantly, allowing functional arguments to defeat statutory prohibitions encourages aggressive tax positions. What begins as a factual explanation evolves into a legal entitlement. Over time, this undermines the integrity of the GST framework itself.
In a statute-centric tax like GST, functional relevance may explain why something is used — but it cannot determine whether the law permits it.
The Correct Interpretative Hierarchy under GST
A disciplined interpretative hierarchy is essential for consistency under GST. Experience suggests that disputes often arise not from ambiguity in law, but from skipping interpretative steps.
The correct approach is sequential. First, the statutory language must be examined in its plain and ordinary meaning. If the provision is clear, the inquiry ends there. Second, any express exclusions or statutory bars must be applied strictly, without importing notions of equity or business logic. These bars represent deliberate legislative choices.
Only in the third stage — where the statute is silent, unclear, or internally inconsistent — does purposive or functional interpretation become relevant. Functional tests assist in understanding factual character, not in creating substantive rights.
This hierarchy preserves certainty while allowing limited interpretative flexibility where genuinely required. It also aligns judicial interpretation with constitutional boundaries.
Under GST, interpretation is not a balancing exercise between fairness and revenue. It is a structured process governed by statutory command. Functional tests operate at the margins, not at the core of entitlement.
Conclusion
The recurring tension between functional interpretation and statutory prohibition under GST is not a question of fairness, but of constitutional discipline. While functional tests play a legitimate role in understanding economic reality, they cannot be elevated to a tool for overriding explicit legislative commands.
GST is a statute-led tax. Its exclusions are not interpretative gaps but conscious policy choices embedded in law. Once a statutory bar is triggered, judicial interpretation has a limited role — to apply the law as written, not to recalibrate it based on commercial convenience or perceived inequity.
As per our experience, Many GST disputes do not fail due to lack of statutory clarity, but because functional arguments are advanced beyond their permissible scope. Courts have consistently reiterated that interpretation cannot substitute legislation, particularly in fiscal statutes where certainty is paramount.
The real lesson is simple but crucial: functional relevance may explain business use, but statutory language determines legal entitlement. In GST, when the law draws a line, interpretation must respect it.
Key Points to Remember
- Functional tests are interpretative aids, not independent sources of entitlement under GST.
- Statutory bars reflect deliberate legislative intent, not drafting omissions.
- Once statutory language is clear, equitable or business-necessity arguments lose relevance.
- Courts interpret fiscal statutes; they do not rewrite tax policy.
- Overuse of functional reasoning leads to uncertainty, inconsistent rulings, and avoidable litigation.
- The correct GST approach is sequential:
Statute first → exclusions next → functional analysis only if ambiguity exists. - In GST, commercial logic cannot override legislative command.
Sources:
- Central Goods and Services Tax Act, 2017 – Sections 16 and 17
- GST Law and Rules – CBIC (Official Portal)
https://www.cbic.gov.in - See, inter alia, Commissioner of Customs (Import) v. Dilip Kumar & Co. (2018); Mathuram Agrawal v. State of Madhya Pradesh (1999), on strict interpretation of taxing statutes and the limits of purposive construction.
Related Reading on TaxBizMantra
- ITC on Immovable Property — What Survives After Safari Retreats
- Section 17(5)(d) and the Meaning of “On Own Account” under GST
Disclaimer
This article is intended for academic and informational purposes only. It discusses legal principles of statutory interpretation under GST and does not constitute legal, tax, or professional advice. Readers should evaluate facts independently and consult qualified professionals before taking any position or action.
