Blocking of Input Tax Credit in Terms of new Rule 86A of the CGST Rules
With Effect from 26.12.2019 Rule 86A was inserted in the Central Goods and Service Tax Rules, 2017(herein after defined as CGST Rules) which was notified through Notification (Central Tax ) No 75/2019, stating the condition to use Input Tax Credit available in the Electronic Credit Ledger (hereinafter defined as ‘ECL’).
Rule 86A gives power to Commissioner or Officer Authorized in his behalf, not below the rank of Additional Commissioner, to restrict the use of Input Tax Credit from ECL. Further restriction shall cease to have effect after expiry of period of one year from the imposition of date of such restriction.
Rule 86A of CGST Rules was introduced for Fraudulent, Bogus or Irregular GST credit by the Recipients.
Before introduction of the Rule 86A of CGST Rules there has been a scenario where Credits were blocked by Officer without giving any valid reason, or without issuing show cause notice or providing opportunity of being heard to them. Therefore Rule 86A was specifically introduced in CGST Rules, so as to give powers to Officers for Blocking of Credits.
Cases where Restriction can be imposed by the Officer:-
1. The Credit has been availed on the basis of Tax Invoices or Debit Notes or other documents prescribed in Rule 36 of the CGST Rules, but if the same is issued by registered person who is not found to be conducting any business from the place of his registration and if the Credit is availed without receipt of Goods, Services or both
2. Credit has been availed on the basis of Ta Invoice or Debit Noted but, the tax charged has not been paid to the Government
3. The Recipient has availed the credit however is not found to be in existence or not doing any business from the place of his registration
4. The Registered person is not having any documents as prescribed in Rule 36 of CGST Rules.
The Rule specifically states that, credit can only be restricted if the Commissioner or Officer Authorized in his behalf as a “reason to believe” that credit has been availed fraudulently or is ineligible
Reason to believe has been discussed in various case laws where reasons are recorded in written documents. It is pertinent to note here that it becomes imperative, that the reasons should be given to Assesse for his blocked portion of credit.
Rule 86A of CGST Rules further does not provide procedure to be followed in the case disallowance of credit. Therefore without providing intimation or opportunity or being heard will be a violation of principles of natural justice and it creates unjust enrichment to genuine tax payers or Assesse.
To discuss the above question we need to go into legality of the “Central Goods and Service Tax Act”. It is pertinent to note here that in the CGST Act there is no Section which particularly enact Rule 86A. To go one step further Rule 86A over rides or by pass Section 73 of the CGST Act. Section 73 specifically states that “where it appears to Proper Officer that any tax has not been paid, short paid, erroneously refunded or credit has been wrongly availed other than the reason of Fraud, wilful misstatement or suppression of facts to evade a tax a notice is to be served to the Assesse as to why the amount payable should not be levied under the Provision of The Act. Therefore to conclude Rule 86A denies the very basic Principle of Section 73 of the Act under which notice is issued and therefore in effect there will always be a question of constitutional validity of Rule 86A. Needless to say in terms of Principle of Legality “Rules cannot override the Act”