‘Robbing Peter to pay Paul’ appears to have become an unsaid meaning of the draconian Rule 86A of the CGST Rules 2017. If Paul defrauds then Peter will be punished for his fraud !

Rule 86A in sub-rule (1)(b) specifies:

The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

A plain reading of the above rule signifies that the intention of the Government is only to curb the menace of availing fraudulent credit but it has many unintended ramifications. There is also no clarity on the scope of the term “Reason to Believe” in the given sub-rule. Would it not make it any flimsy reasons, doubts, inhibitions, imagination etc in its scope resulting in unnecessary harassment to honest taxpayers? It needs to be properly defined as to what are such reasons to avoid indiscrimate blockage of ELCs leading to disruption in working capital management of a recipient of supplies.

It is important to note that the details of GSTR-1 filed by the supplier reflect in the dashboard of the recipient under GSTR-2A report. The payment to the government is done by the supplier and is reported vide GSTR-3B, which the recipient has no control to verify nor the same is mandated under the law.

Hence, a bonafide recipient who has received the supplies, made the payment of the same to the supplier and noted the details of such supplies in GSTR-2A, would be eligible for availing the ITC.

But this rule empowers the GST Officer to BLOCK the Electronic Credit Ledger of the recipient just because the supplier has not paid the tax to the Government. The below cases are eye-opener for any bonafide recipient of GST tax invoice:

I. Astha Ferrotech Pvt Ltd Vs State Of Jharkhand – Due to non-filing of GSTR-3B by its vendor though GSTR-1 was filed by petitioner, their electronic credit ledger was blocked.

II. Aryan Tradelinks Vs UoI – The recipient’s credit ledger was blocked without assigning any reasons. After repeated correspondence with the Revenue they were informed that their credit ledger was blocked, because one of their vendors was being investigated for issuing invoice without actual supply of goods or services. The recipient had to knock the doors Hon’ble Karnataka High Court to get relief !

It is interesting to note that while the provision disallows the usage of ITC to the extent of the amount involved in the given invoice, why the entire Credit Ledger is blocked and that also without informing the recipient !!!

Conclusion :

Firstly, there should not be a blockage of ELC just because the supplier has not paid tax to the government.

Secondly, the blockage should be to the extent of the amount involved in the given tax invoice and the entire ELC should not be blocked.

Thirdly, there has to be proper and immediate communication to such recipients.

Author Bio

Qualification: Post Graduate
Company: MNC
Location: Nagpur, Maharashtra, India
Member Since: 13 May 2020 | Total Posts: 3
I am having 25+ years experience in Indirect Tax and GST function comprising of Tax planning and optimization, debottlenecking GST situations, Litigation - GST and erstwhile IDT laws and routine compliances. View Full Profile

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April 2021