GST Advisory

CBIC issues recommendations to GST Officers regarding ITC Blocking

The CBIC has issued instructions for GST field officers restricting input tax credits, stating that such ITC blocking should be based on “material proof” rather than “suspicion”. The instructions outlined five particular scenarios in which such credit might be denied by a senior tax official. These comprise the use of credit without an invoice or a legitimate document, as well as the use of credit by customers on invoices on which the seller has not paid GST.

The Central Board of Indirect Taxes and Customs (i.e., CBIC^[1]) has given clarifications that the Commissioner of the department, or an officer duly authorized by him & who is not below the position of Assistant Commissioner, should make an opinion regarding the blocking of input tax credit (ITC) only after “judicious application of mind” in light of all the circumstances of the situation.

ITC Blocking must be in accordance with Rule 86A

It is emphasized that the power to block a debit of ITC from an electronic credit ledger from being made must not be used mechanically and that a thorough review of all the circumstances of the case is required to decide which situations are appropriate for exercising the power under Rule 86A.

In December 2019, the government added Rule 86A to the GST regulations, allowing tax officers the authority to suspend ITC accessible in a taxpayer’s electronic credit ledger if the officer has “reasons to suspect” that the ITC was obtained unlawfully.

With effect from December 26, 2019, Rule 86A of the CGST Rules, as legalized by notification No 75/2019, empowers the revenue to impose new requirements or limits on the usage of the quantum of input tax credit (ITC) available in the electronic credit ledger. This regulation gave the Department the authority to limit a person’s credit in specific circumstances where there are grounds to think that an ITC has been obtained illegally or is invalid.

The Commissioner or any other officer empowered by him in this behalf, not lower than the level of an Assistant Commissioner, can block a taxpayer’s ITC if he has reasonable grounds to think that the ITC is being claimed fraudulently or that the ITC is ineligible for the following reasons:

• The tax invoices with regard to which the ITC is being claimed had been issued by a registered person (or individual) who was discovered to be non-existent or who was not conducting business from the location for which the registration was acquired. The ITC is applicable on an invoice for which no supply was received.
• The ITC is granted or availed of by a taxpayer on invoices for which no tax has been paid to the government.
• The ITC is taken by a registered person under GST law who is discovered to be non-existent or not conducting business from the location for which the registration was obtained.
• The registered individual does not have an invoice or debit note on which to base his ITC claim.

Under this rule, GST tax officials had already blocked Rs. 14,000 crores in input tax credit (ITC) for 66,000 enterprises until early October.

The CBIC stated in its November 2 recommendations that because the remedy of disallowing debit of an amount from an electronic credit ledger is unusual (& extraordinary) in nature, it should be used with extreme prudence and care.

It considers an objective judgement based on intelligent care and examination as opposed to a simply subjective assessment of suspicion.

The reasons must be based on significant evidence available or acquired in connection to fraudulent availing of input tax credit or invalid input tax credit availed in accordance with the conditions/grounds set out in Rule 86A sub-rule (1).

Segregation of powers

On the blockage of the tax credit, these rules established monetary limitations for the distribution of responsibilities between commissions, joint commissioners, and assistant commissioners.

A decision would be made by the principal commissioner/commissioner for ITCs worth more than Rs. 5 crores being blocked. If the monetary amount is between Rs. 1 and Rs. 5 crores, an additional commissioner or joint commissioner will make a decision, but if the amount is less than Rs. 1 crore, an ITC blocking decision will be made by a deputy commissioner or assistant commissioner level officer.

Further, according to CBIC, the concerned assessee whose ITC has been blocked by the department will be informed about the same, together with the details of the GST official who has blocked the ITC. Now, the assessee may approach the concerned official for presenting his or her submissions. The Commissioner may clear off the tax credit or unblock ITC if he is fully satisfied that the conditions for denying the credit no longer exist. The department is required to conclude its proceedings within a period of 1 year of ITC blocking.

These are all positive initiatives since they will limit departmental action and the officials will not be able to obstruct the ITC manually on no pertinent grounds. Previously, taxpayers experienced several difficulties, and in some cases, the barrier of ITC blocking was not lifted even after a year.

Takeaway

The CBIC has provided guidelines to help simplify the process of ITC blocking and unblocking. Experts believe that if federal and state tax officials implement these broad rules to the word and spirit, it would undoubtedly minimize the amount of litigation for honest taxpayers who are now being harassed by tax authorities with regard to ITC blocking.

Read our article:Is blocking of ITC by the GST Department legal – Rule 86A?