Blocking of Electronic Credit Ledger by GST Officer

In the Goods and Services Tax regime,  Input Tax Credit (ITC) plays a crucial role in reducing the cascading effect of taxes and ensuring seamless flow of credit across the supply chain. However, to safeguard government revenue and curb fraudulent practices, the law also empowers authorities to block ITC in certain cases. Rule 86A of the CGST Rules, 2017 is one such provision.

Rule 86A was introduced to give powers to GST officers to block fraudulently availed or ineligible input tax credit (ITC) available in the Electronic Credit Ledger of a registered taxpayer.

Under this rule, an officer not below the rank of Assistant Commissioner, if duly authorised by the Commissioner, can restrict the use of ITC for payment of GST or claiming a refund provided there is a reason to believe that the ITC is not genuine.

The GST officer may restrict ITC if there is reason to believe that credit has been:

1.Claimed on Fake Invoices issued by a non-existent supplier, or Supplier not conducting any business from their registered premises.

2. Claimed Without Actual Receipt of Goods or Services

3. Supplier Has Not Paid the GST to the Government

4. The taxpayer himself is found non-existent or not conducting any business.

5. The taxpayer does not have a valid tax invoice or debit note or other document prescribed under Rule 36.

Once such a restriction is imposed, the blocked amount in the Electronic Credit Ledger cannot be used:

To pay GST liabilities under Section 49, or

To claim a refund of any unutilised ITC.

This acts as a temporary suspension of the taxpayer’s right to use the credit until the matter is clarified.

The restriction can be lifted if the officer is satisfied that the conditions no longer exist.

Importantly, any restriction imposed under Rule 86A automatically ceases after one year from the date it was imposed whether or not the matter is resolved.

While Rule 86A empowers officers to block ITC, it also has built-in safeguards:

“Reason to believe” must be based on material evidence, not assumptions.

Written reasons must be recorded before imposing the restriction.

The rule cannot be used arbitrarily or to harass genuine taxpayers.

Courts have repeatedly emphasised that Rule 86A should be exercised with caution, ensuring principles of natural justice are followed.

Rule 86A is a crucial anti-evasion tool under GST law, aimed at curbing fraud and protecting government revenue. While it grants significant powers to the authorities, it also requires careful and judicious application, balancing revenue interests with taxpayer rights. Genuine businesses must stay vigilant, compliant, and well-documented to avoid disruptions due to ITC restrictions.