GST Advisory

Is blocking of ITC by the GST Department legal – Rule 86A?

Input Tax Credit refers to obtaining credit for the GST paid on purchases of goods and services utilized in the course of business. The Mechanism of Input Tax Credit is the backbone of GST and one of the primary reasons for its implementation. However, there are many instances where the Government identified that ITC is availed of by taxpayers through fake transactions and to take unjust benefits under GST. Therefore, the government enacted Rule 86A to prevent the use of fraudulently obtained ITC and thereby preserve the revenue’s interests.

What does Rule 86A provide for?

The government introduced Rule 86A in Notification No. 75/2019 dated 26.12.2019 to prohibit fraudulently obtained ITC. The primary goal of enacting this Rule was to prevent the use of fraudulently obtained ITC.

According to this Rule, a Commissioner of the Department or any officer authorized by him may limit the ITC available in the taxpayer’s electronic credit ledger if he has “reasons to believe” that he has fraudulently obtained ITC. The Commissioner must document the cause for blocking ITC in writing.

Under what conditions, the ITC can be blocked under Rule 86A?

The commissioner of the Department or any officer authorized by him, not lower than the rank of an Assistant Commissioner, can withhold 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 reasons stated below:

• The tax invoices used to claim the ITC were issued by a registered person 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 invoices for which supply has not yet been received.
• The ITC is granted on invoices for which no tax has been paid to the government.
• The ITC is obtained by a registered person 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 the invoice or debit note on which he is claiming the ITC.

As can be seen from the above, the primary goal of enacting Rule 86A is to limit the use of ITC based on fake transactions made without payment of tax or, in some situations, without an invoice.

If the Commissioner determines that the conditions for denying credit no longer exist, he may allow credit to be used. But the restriction will be lifted only after one year from the date the restrictions were imposed.

It should be emphasized, however, that Rule 86A does not require the Commissioner to provide the assessee with an “opportunity to be heard” before blocking such ITC, but simply that such reasons be documented in writing by the Commissioner. It is worth noting that, while the said Rule clearly requires the empowered officer to record the reasons for blocking the credit in writing, it does not need the empowered officer to inform the assessee whose ITC has been denied by such officer of the said reasons. Furthermore, the abovementioned provision does not need a previous notice/intimation to be given to the assessee regarding the blocking of ITC.

The legality of blocking of ITC by the GST Department

According to Section 16(1) of the CGST Act^[1], all registered taxpayers who paid tax on inward supplies used to advance their business may claim ITC on such taxes paid. Sub-sections (2), (3), and (4) of Sections 16 and 17 of the CGST Act, 2017 provide certain conditions for claiming ITC and restrictions on claiming ITC. After considering such criteria and restrictions, a taxpayer may claim ITC.

The right of a taxpayer to claim ITC for the discharge of an output tax liability is a legal entitlement that can only be curtailed by certain legal powers. As a result, a taxpayer has a legal right to claim ITC and utilize it to satisfy his output tax liability.

The government has no authority to block ITC under Section 16 or Section 17 of the CGST Act. Furthermore, there is no other provision in the CGST Act that authorizes the government to limit ITC. Section 164 of the CGST Act, on the other hand, gives the government the authority to create rules to carry out the Act’s requirements. The government has used this right to enact Rule 86A, which allows the Commissioner to withhold ITC.

Rule 86A was enacted to give the Department the legal authority to have an ITC blocked by a Tax Officer if the ITC was obtained unlawfully. However, invoking Rule 86A necessitates the existence of reasonable grounds to assume that the ITC was improperly obtained, as well as supporting papers or documentation. The application of Rule 86A would be erroneous if there were no good reasons to believe.

A case that strengthens the introduction of Rule 86A

The introduction and legality of Rule 86A can be linked to a Gujarat High Court Ruling (2020-TIOL-2228-HC-AHM-GST). In the said case, by using Rule 86A of the CGST Rules, the assessee challenged the Revenue’s jurisdiction to block ITC pending inquiry or investigation. The Revenue, on the other hand, discovered that the petitioner was claiming ITC on invoices received from the supplier who was being investigated for issuing bills without a supply of goods.

The Revenue Department demanded that the assessee deposit a particular amount of cash and also froze his credit ledger. Later, he was denied reimbursement of the deposited amount, and his credit ledger was also blocked. As a result, he filed a writ with the Gujarat High Court, challenging the Revenue’s right to block ITC on the following grounds:

He had paid GST on inputs using real-time gross settlement, and he had also created the finished products and paid GST on them using the inputs he had procured. The Revenue had no proof that the inputs had not been received. Moreover, the assessee filed GSTR-3B on time, and the Revenue presented no objections to claiming ITC at that time.

The Court ruled that Rule 86A of the CGST Rules might be applied while an investigation or inquiry is ongoing. The taking of ITC and its utilization are two distinct processes, and so no vested right of the taxpayer emerges prior to obtaining credit.

Furthermore, Rule 86A demands the existence of a “reason to believe” that ITC was obtained fraudulently, which should be demonstrated by the application of one’s mind as well as supporting documents. In the absence of such, the exercise of power would be considered wrong in law. In this case, the inquiry and blocking of ITC were neither malicious nor based on a lack of proof.

Conclusion

On the basis of the foregoing, it is apparent that the Department should exercise the power under Rule 86A on the basis of some reasonable belief, which should be supported by compelling information and facts on records. In the lack of appropriate grounds, the actions conducted under Rule 86A become null and void and may be invalidated.

In a nutshell, the empowered officer can proceed to block a taxpayer’s ITC only if he has precise, credible, and relevant information that the taxpayer has willingly or knowingly done an act to wrongfully obtain ITC that would otherwise be unavailable to him, such as bogus sales and purchases or sales and purchases without invoices. Before credit is blocked, these grounds must be documented in writing by the officer.

Read our Article: Notice or Order from GST Department: Assessments under GST