Rule 86A in the CGST Rules vide notification No 75/2019 has been introduced w.e.f. 26.12.2019 to empower the revenue to impose additional condition/restriction on use of amount of input tax credit available in the electronic credit ledger. This rule has given drastic powers to the Department to restrict the credit of any person in certain cases where there is reason to believe that ITC is availed fraudulently or is ineligible.
We have recently seen the practice of GST Department of blocking the credit of a person merely by way of computer entry on the common portal of GST on one pretext or the other, without there being any legal provision allowing expressly providing for such cource of action. The Gujarat High Court in a recent case namely Valerius Industries Vs Union of India decided on 28.08.2019 has held that such blocking of credit by way of mere computer entry is absolutely illegal.
Now, by introduction of Rule 86A it seems that a somehow similar cource of action like blocking of credit has been given a legal basis. Rule 86A has empowered the Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner to put a restriction for maximum of one year on the input tax credit available in the credit ledger of a person to the effect that it cannot be used for discharging the GST output liability u/s 49 or not to allow refund of the credit in some situations.
Rule 86A as introduced runs as under:
Rule 86A. Conditions of use of amount available in electronic credit ledger-
(1) 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:
a) 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-
i.issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
ii.without receipt of goods or services or both; or
b) 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; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,
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.”
(2)The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.
From the above rule it is clear that before power under Rule 86A is exercised there must be a reason to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible qua the following reasons:
1. Supplier found non-existant or not conducting business on its registered place:It has been availed on the basis of documents prescribed under Rule 36 i.e tax invoice,debit note etc issued by a registered supplier who has been found non-existent or not to be conducting any business from any place for which registration has been obtained.
2. Non receipt of goods or services or both: It has been availed on the basis of documents prescribed under Rule 36 i.e tax invoice,debit note etc without receipt of goods or services or both.
3. Tax not paid into the Government treasury: It has been availed on the basis of documents prescribed against which no tax has been paid into the Government treasury.
4. Recipient found non-existant or not conducting business on its registered place: It has been availed on the basis of documents prescribed under Rule 36 i.e tax invoice,debit note etc issued by a registered person availing the credit (i.e. recipient) who has been found non-existent or not to be conducting any business from any place for which registration has been obtained
5. Availing of credit without documents: The registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36.
The restriction on the utilization of credit under Rule 86A will ceases to have effect after the expiry of a period of one year from the date of imposing such restriction.
It would be interesting to see whether the mechanism of blocking of credit (as is currently done on the common portal by the Department) is adopted for exercising the power under Rule 86A or some other some other mechanism is worked out.
The restriction in the Rule 86A though seems to be temporary but is drastic as it can be used if there is a reason to believe as to the grounds stated above and a final finding is not required as to eligibility or ineligibility of the credit. However, before exercising this power reasons must be recorded in writing. Hopefully the drastic powers in the rule are exercised spairingly and not used as a routine matter in every case.