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:-

  • Where Officer has a reason to believe that Credit has been Fraudulently availed or is ineligible to avail Credit

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.

  • Although theoretically it seems that Government wanted to block credit in the cases where registered person is not found into existence, tax has not been paid to Government or credit has been availed without receipt of Goods or Services or both. However the Crux in this particular case is how would an honest tax payers decide whether there vendor is in existence or is paying tax to the Government etc. Therefore with a view to not provide any hardship to honest tax payers, in the 39th Council meeting it was decided that the “Know Your Supplier” will be introduced, so that basic information can be known about the Vendor. It is pertinent to note here that the effect of council meeting for this particular case has not been notified yet and therefore it will be very difficult to find the status of different Vendors. Genuine Tax payers will always therefore challenge the disallowance of credit in the court of law and further there working capital will go for ‘toss’ due to blockage of Input Tax Credit.
  • Description of Rule 86A of the 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.

  • Whether Rule 86A is constitutionally valid or not?

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”

  • Conclusion :- In our view definitely the Provision can be challenged in the Court of Law, meanwhile Government should come with a clarification on restriction of Blocked Credit under Rule 86A and should lay down the proper procedure to be followed before invoking Rule 86A , therefore it does not create hardship to genuine taxpayers.

Author Bio

Qualification: CA in Practice
Company: MHSV & CO Chartered Accountants
Location: Mumbai, Maharashtra, IN
Member Since: 30 Jun 2020 | Total Posts: 1

More Under Goods and Services Tax

3 Comments

  1. Vidyutrai Jayantilal Mankodi says:

    GOOD ANALYSIS OF THE HARDSHIPS LIKELY TO BE FACED BY GENUINE TAX PAYERS. REGADING RULE 73, I UNDERSTAND, IT TALKS ABOUT ISSUE OF NOTICE FOR RECOVERY OF TAX SHORT PAID, INPUT CREDIT ALREADY ERRONEOULSLY AVAILED/UTILIZED,ETC. IN SUCH CASES, TAX WILL HAVE TO BE RECOVERED FROM ASSESSEE. BUT 86A TALKS ABOUT STOP GAP WITHHOLDING OF CREDIT, BEFORE IT IS ACTUALLY ADJUSTED AGAINST PAYMENT LIABILITY. HENCE, IN A WAY, BOTH ARE DIFFERENT IN MY VIEW. YOU CAN CORRECT ME PLEASE IF I AM WRONG. tHANKS FOR GENUINE CONCERN EXPRESSED BY THE AUTHOR.

  2. Atulkumar Padia says:

    Very helpful article. I think department have to set mechanism to find fraudulent cases. They should not penalize genuine tax payers. In this law we see that genuine tax payer is suffering very much.

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