GST

All you need to know about CGST Rule 86A on ITC

Under the Goods and Service Tax, fraudulent Input Tax Credit is rampant, and the government is taking steps to uncover it. Dealers engaging in such misconduct are facing harsh penalties. Under CGST Rules of 2017, Rule 86A was introduced. Rule 86A on ITC forbids Electronic Credit Ledger debit transactions when GST Authorities believe ITC was unlawfully obtained or invalid. This article provides a details analysis of Rule 86A. The author has delved into the significance and implications of Rule 86A, its applicability and the procedural aspect involved. By discussing the relevant cases.

Examination of Rule 86A on ITC

“86A. Conditions of use of Amount Available in electronic credit Credit Ledger.

1. The Commissioner or an officer designated by him in this regard, who is not a lower-ranking officer than an Assistant Commissioner, who has reasonable grounds to suspect that an input tax credit listed in the computerised credit ledger has been fraudulently claimed or is illegitimate in so far as:
2. Input tax credit was obtained by tax invoices, debit notes, or other documents as per Rule 36- 
3. Issued by a registered person who was discovered to be non-existent or not doing any business from any location for which registration was obtained.
4. Absence of receipt of goods or services, or both; or.
5. Input tax credit has been obtained based on tax invoices, debit notes, or any other document prescribed under Rule 36 in respect of any supply for which the tax levied has not been paid to the Government.
6. The registered person claiming input tax credit has been discovered to be non-existent or to be doing no business from any location for which registration has been obtained or 
7. The registered person claiming an input tax credit lacks a tax invoice, debit note, or any other document required by Rule 36.

May, for reasons to be recorded in writing, refuse to enable debit of an amount comparable to such credit in the electronic credit ledger to discharge any responsibility under section 49 or to claim a refund of any unutilized amount.

• The Commissioner or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above no longer exist, allow such debit. 
• Such restriction shall cease to have effect after the expiry of one year from the date of imposing such restriction.

Explanation of Rule 86A on ITC

GST is not new to the concept of punitive action against tax evaders. Such rules were already included in the former Central Excise Law under Rule 12CC of the Central Excise Rules of 2022 and Rule 12AA of the CENVAT Credit Rules of 2004, which was later replaced by Rule 12AAA.  In exercising the authority granted by the abovementioned rules, the government issued Notification N0.32/2006-CE (N.T) dated December 30, 2006, outlining particular instances in which restrictions would be imposed (this includes restrictions on the use of CENVAT credit).

The curse of the restriction on applying ITC has been carried forward to the GST system due to fraudulent invoices. On December 18, 2019, the GST Council convened its 38^thmeeting. It was also suggested that the CBIC take appropriate measures to restrict fraudulently obtained ITC credit in specific scenarios in order to combat this issue; hence, under the CGST Rules, 2017 via Notification 75/2019, Rule 86A on ITC was inserted.

The legal reasoning behind Rule 86A on ITC

The Hon’ble High Court stated in Alfa Enterprise v. State of Gujarat that even with the help of the instructing officer, the Ld. AGP could not name any legal provision authorising the respondent authorities to stop the credit. Following this remark, the Hon’ble HC directed the respondent authorities, in an order dated 01.10.2019, to unlock the credit accessible in the electronic credit ledger.

Therefore, the department was drawn to Alfa Enterprises. As a result, it was recommended that the GST Council, as a revenue-augmentation measure, approve the inclusion of a new Rule 86A of the C/SGST Rules to prohibit using such credit (credit obtained through fraudulent invoicing). As can be seen from the foregoing, the comments provided by the Principal Commissioner, GST Policy¹ Wing, were aimed at ‘limiting the utilisation of credit obtained in relation to fraudulent invoices’. However, in addition to fraudulent invoicing, Rule 86A on ITC imposed additional credit-blocking restrictions, such as:

1. Tax not paid (clause b);
2. Not in possession of the invoice (clause d). 

Whether the Rule 86A ultra vires of CGST Act?

Based on the authority provided by the CGST Act of 2017, the CGST Rules were created. In cases where credit has been exploited, Section 16 of the Act limits credit availment and permits reversal. It has been argued that:

“The right to avail and utilize ITC for discharging tax liability is a legal right arising from the statute, and it is trite in law that this right can be curtailed only with the specific power of the law and not otherwise.”

In light of the foregoing, it was argued that Rule 86A is in violation of Section 16 of the CGST Act since it is a delegated law that grants the ability to restrict the Input Tax Credit despite the registered recipient’s fault. However, with the adoption of guidelines, proper authority and mechanisms for the authorities to block ITC under Rule 86A have been prescribed. Furthermore, the legal right guaranteed under Section 16 of the CGST Act is not absolute. Section 16(1) refers to “conditions and restrictions as may be prescribed” before granting eligibility for ITC benefits”.

Regarding the nature of ITC under the CGST statute, the Apex Court held in the case of M/S. TVS Motor Company Ltd. v. The State of Tamil Nadu and Others that

“… right to claim ITC is not a vested right or an indefeasible right. It is a benefit conferred under the Act in certain contingencies and subject to conditions prescribed in the statutory scheme. Therefore, it is open to the State Legislature to provide for conditions and restrictions while extending the concession. Likewise, it was also necessary for any assessee to claim input credit to fulfil those conditions.”

Therefore, noting that detailed guidelines have been issued for blocking ITC,which is not an absolute right, Rule 86A cannot be said to be ultra vires of Section 16 of the CGST Act.

Grounds for Invoking Rule 86A on ITC

The following are the grounds for invoking Rule 86A on ITC; additionally, the Commissioner or an officer approved by him (not lower than the level of Assistant Commissioner) must have reason to think that ITC was obtained fraudulently and thus disallowed only after examining the points listed below:

1. The registered person obtains credit for invoices or debit notes issued by a supplier who is discovered to be non-existent or to be operating no business from the address stated in the registration.
2. The registered person obtains credit on bills or debit notes without getting goods, services, or both.
3. The registered person receives credit for invoices or debit notes on which tax has not been paid to the government.
4. The registered person claiming the credit has been found to be non-existent or to be running no business from the address stated in the registration.
5. The registered person obtains credit without an invoice, debit note, or other valid documentation.

What is the procedure for disallowing under Rule 86A on ITC?

The Commissioner or an officer who is authorised to act on their behalf must have reasonable grounds for suspecting that the input tax credit that the registered person claimed was claimed fraudulently or is ineligible, as per conditions or grounds, based on the material evidence that was made available and must have determined that it is necessary to protect the interests of revenue by disallowing debit of the electronic credit ledger of the claimed person.

Before the concerned officer moves through with preventing the debit of the amount from the electronic credit ledger of the aforementioned person, he is required to document these “reasons to believe” in writing and place it in the appropriate file.

The amount barred for debit from the electronic credit ledger should not exceed the amount of the input tax credit suspected to have been illegally obtained or ineligible, as outlined in the requirements and grounds presented earlier. The action taken by the Commissioner or the authorised officer to reject a debit from the electronic credit ledger of a registered person is informed on the portal, along with the details of the officer who has disallowed such a debit.

Proper authority for Rule 86A on ITC

The exercise of rights to prohibit the debit amount from ECL under Rule 86A may be authorised by the Commissioner/Principal Commissioner, subject to the monetary restrictions specified below:

Total amount of ineligible or fraudulently availed input tax credit	Officer to disallow debit of amount from electronic credit ledger under Rule 86A
Not exceeding Rupees 1 crore	Deputy Commissioner/Assistant Commissioner
Above Rupees 1 crore but not exceeding Rs. 5 crore	Additional Commissioner/Joint Commissioner
Above Rs. 5 crore	Principal Commissioner/Commissioner

Suppose an Audit conducted under Section 65 or 66 of the CGST Act of 2017 reveals that input tax credit has been unlawfully obtained or is ineligible based on the criteria outlined in Rule 86A. In that case, it may be necessary to prohibit the debiting of the electronic credit ledger by Rule 86A. In such circumstances, the Commissioner or Principal Commissioner of the CGST Audit Commissioned may refer the matter to the jurisdictional CGST Commissioner for examination.

Landmark Judgments on Rule 86A on ITC

• Gujarat High Court’s Take on Rule 86A

The Gujarat High Court, in the case of S.S. Industries v. UOI, has determined that Rule 86A on ITC imposes a duty on the relevant authority to form an opinion. However, the rule does not explicitly require issuing a specific order that provides prima facie reasons for invoking Rule 86A. In light of the aforementioned circumstances, it is imperative for the Government to thoroughly examine the subject matter, establish relevant directives, and establish a set of protocols for the implementation of authority in accordance with Rule 86A. The High Court further noted that Rule 86A of the CGST Rules should not be employed to burden taxpayers unjustly.

• Samay Alloys India Pvt. Ltd. v. State of Gujarat

The case of Samay Alloys India Pvt. Ltd. v. State of Gujarat was decided by the Gujarat High Court. The court ruled that to exercise the power under Rule 86A of the CGST Rules, it is necessary for there to be credit available in the electronic credit ledger, which is claimed to be eligible. If a credit balance is present, the Authority reserves the right, with proper written documentation, to decline the authorisation of a debit transaction equivalent to the amount of said credit. Nevertheless, the governing body lacks the authority to prohibit future lending.

The High Court observed that the invocation of power under Rule 86A of the CGST Rules is impossible in cases where Input Tax Credit (ITC) is unavailable in the computerised credit ledger. Legal action can be commenced against fraudulent conduct by Sections 73 and 74 of the legislation above. According to Rule 86A of the CGST Rules, the utilisation of the electronic credit ledger for making payments is not prohibited for a registered individual.

• Nipun A. Bhagat v. State of Gujarat

The case of Nipun A. Bhagat v. State of Gujarat involves the revocation of the Writ Applicant’s Input Tax Credit (ITC) by the GST Authority, pursuant to Rule 86A of the Central Goods and Services Tax (CGST) Rules. This action was taken to recover taxes owed by another company, in which the Writ Applicant held a position as Director. The Gujarat High Court has made an observation regarding the applicability of Rule 86A of the CGST Rules. According to the court, this rule can be invoked by the Commissioner or an authorised Officer, who must provide valid reasons to support their belief that Input Tax Credit (ITC) recorded in the ledger has been unlawfully obtained.

The High Court noted that the GST Authority did not disclose any justifications for applying Rule 86A of the CGST Rules in the current case. Based on a range of legal assessments, the High Court determined that the Sales Tax Act of 1956 does not include a provision similar to Section 179 of the Information Technology Act of 2000, which imposes tax obligation on directors of a corporation. Consequently, the High Court ruled in favour of the Petitioner’s motion and directed the GST Authority to lift the blockage on the Input Tax Credit (ITC).

• Ambika Creation v. Commissioner, Govt. of Gujarat

The Gujarat High Court, in the case of Ambika Creation v. Commissioner, Govt. of Gujarat, rendered a decision stating that the computerised credit ledger’s input tax credit (ITC) would be unblocked automatically after one year of being barred. In this particular instance, despite the passage of a one-year duration, the GST Authority refrained from unblocking the Input Tax Credit (ITC) and granting the taxpayer permission to utilise the waiting ITC.

According to the ruling of the Gujarat High Court, once the prescribed one-year period has elapsed, the GST Authority no longer possesses the discretion to refrain from unblocking the Input Tax Credit (ITC). The utilisation of the available Investment Tax Credit (ITC) by the taxpayer could be prevented solely by the implementation of a newly issued directive. The High Court further observed that the GST Authority would bear personal responsibility for any financial detriment incurred by the taxpayer in the event of a future occurrence of a like case.

Conclusion

The CGST Rules, 2017, were amended on December 26, 2019, to introduce Rule 86A. The said rulegrants the Commissioner or a duly authorised officer, holding a rank no lower than that of an Additional Commissioner, extensive authority to impose limitations on the utilisation of Input Tax Credit (ITC) in situations where there exists a reasonable suspicion that the ITC has been acquired through fraudulent means or is not eligible for claim. If the circumstances that led to the prohibition no longer apply, or if a period of one year has elapsed from the implementation of the restriction, the relevant official has the authority to remove the block.

A writ petition has been initiated in the Kalpsutra Gujarat v. Union of India to challenge the validity of Rule 86A because it is beyond the scope of authority granted by the CGST Act. The Court acknowledged the potential for the revenue authorities to use the Rule in order to intimidate the taxpayer and, thus, instructed the issuance of comprehensive guidelines delineating the prescribed method for using Rule 86A on ITC. Further, in the case of S.S. Industries v. UOI, The Gujarat High Court, in its esteemed judgement, determined that Rule 86A imposes a duty on the relevant authority to issue an opinion. Hence, the comprehensive guidelines were issued by CBIC in response to court rulings, which aimed to provide officers with clear instructions on the exercise of Rule 86A powers.

Frequently Asked Questions(FAQs)

1. https://gstcouncil.gov.in/gst-council