BLOCKING OF INPUT TAX CREDIT UNDER RULE 86A OF THE GST RULES: POWER IS NOT UNFETTERED URGENT GUIDELINES REQUIRED.
“Power tends to corrupt and absolute power corrupts absolutely”.
John Delberg Acton.
The aforesaid proverb was rightly said by Lord Acton the British politician of the 19th Century who has the opinion that with increase of power moral sense diminishes.
The power given to an authority is a power of responsibilities and this power has to be exercised with utmost care in larger benefit of the society, trade and nation.
For enforcement of the law sometimes drastic measures are taken. Rule 86A has been inserted in CGST Rules, 2017 through a notification dated 26-12-2019. Without doing the academic exercise that whether a rule through notification is sustainable without amendment made in the main statute, this paper is a humble attempt to examine the scope of the aforesaid rules for the purpose of blocking of the input tax credit availed bonafidely and legitimately .
Input tax credit plays a pivotal role in indirect tax administration as in one hand it helps the assessee in discharging the tax liability simultaneously it reduces the cost of production or service by saving the business from “cascading effect” of tax. The above-mentioned rules have given a drastic power in the hands of department which must be used cautiously considering its disastrous impact on the business.
Rule 86A of the Central Goods and Service Tax Rules read as follows:
“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-
b) 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;
a) 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 a bare perusal of the aforesaid rules makes it abundantly clear that an authorised officer minimum of the rank of Assistant Commissioner has the power to block the input tax credit. Though the Rule 86A empowers the authorised officer to block the ineligible credit but that power is not unfettered. The power can be exercised only upon “having reason to believe” that input tax credit available in electronic credit ledger has been frauduantly availed or the person availed the Input tax credit is ineligible for the same for the reasons mentioned in the rule. It is not that the officer has the sovereign power to block the credit which cannot be questioned in further proceedings. The rule has some safeguards for the assessee which are as follows:
a) Reasons to be recorded in writing: Unlike the present practice the ITC cannot be blocked unless and until the commissioner or any authorised officer on his behalf have “reasons” recorded in writing to block the same. Admittedly the reasons have to be good enough to sustain the judicial scrutiny otherwise assessee always has an option to check the same in appropriate judicial proceedings. It is not that the amount of ITC can be blocked with a click of button, the action has to be supported by “reasons recorded in writing”.
b) Reasons to believe: Before passing an order, the concerned officer must have sufficient “reason to believe” for taking drastic action of blocking the credit. The term “reason to believe” is not an empty formality rather it must have a rational connection with relevant factors on the formation of belief. The Hon’ble Gujarat High Court in the matter of S.S. Industries vs UOI, (Spl Civil 8841 of 2020 (DB) has occasioned to examine the scope of Rule 86A and held that formation of reason to believe must have rational connection with relevant factors for forming such believe. The relevant para is as follows:
The Hon’ble court in S.S. Industries (supra) further held as follows:
4. Rule 86A talks about “reason to believe” which is necessary to be formed for the purpose of blocking the input tax credit in cases of inquiry or investigation into fraudulent transactions. Any opinion of the authority to be formed is not subject to objective test. The language leaves no room for the relevance of an official examination as to the sufficiency of the ground on which the authority may act in forming its opinion. But, at the same time, there must be material, based on which alone the authority could form its opinion that it has become necessary to block the input tax credit pending an inquiry or investigation into the fraudulent transactions of fake/bogus invoices. The existence of relevant material is a pre-condition to the formation of the opinion.
44. ………Therefore, the opinion to be formed by the Commissioner or take a case by the delegated authority cannot be on imaginary ground, wishful thinking, howsoever laudable that may be. Such a course is impermissible in law. At the cost of repetition, the formation of the opinion, though subjective, must be based on some credible material disclosing that is necessary to provisionally attach the goods or the bank account for the purpose of protecting the interest of the government revenue. The statutory requirement of reasonable belief is to safeguard the citizen from vexatious proceedings. “Belief” is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed. It is equally true that it is not necessary for the authority under the Act to state reasons for its belief. But if it is challenged that he had no reasons to believe, in that case, he must disclose the materials upon which his belief was formed, as it has been held by the Supreme Court in Sheonath Singh’s case [AIR 1971 SC 2451], that the Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court.
45…………….. The formation of the opinion by the authority undoubtedly should reflect intense application of mind with reference to the materials available on record that it had become necessary to order blocking of the input tax credit pending the inquiry. (See Bhikhubhai Vithlabhai Patel & Ors. vs. State of Gujarat, AIR 2008 SCC 1771).
The Hon’ble Court in S.S. Industries (supra) has also cautioned the authority by stating that the power to block the credit must be exercised based upon cogent or credible material failing which such action may be termed as ‘malice in law’. The relevant paras is as follows:
51. In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of blocking the ITC in exercise of power under Rule 86A of the Rules, then such action would definitely amount to malice in law. Malice, in its legal sense, means such malice as may be assumed from the doing of a wrongful act intentionally but also without just cause or excuse or for want of reasonable or probable cause. Any use of discretionary power exercised for an unauthorized purpose amounts to malice in law. It is immaterial whether the authority acted in good faith or bad faith……….
52. An amount equivalent to such credit: It has come to notice that the power under Rule 86A has been rampantly misused by the officers of the department without realising the fact that only amount disputed can be blocked. For example, if the credit ledger of an assessee has 100 rupees as credit out of which for 20 rupees the officer has some concern. Here he can block the amount of only rupees 20 and any blocking of credit more than rupees 20 is impermissible under the rules.
The Hon’ble High Court of Gujarat in the matter of S.S Industries (supra) has also examined the pari materia provisions of other Acts like Income Tax Act, Central Excise Act, etc. and has held that in all fiscal Statutes such provisions of attachment are made only after issuance of the show cause notice and not before that. The Hon’ble Court also examined rule 159 of the CGST Rules regarding Provisional Attachment and said that these provisions of provisional attachment are made to protect interest of the revenue and in pre-GST era guidelines were there and the procedures were prescribed for attachment. The Hon’ble Court expressed his concern in following terms:
62. Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to passing of any specific order assigning prima facie reasons for invoking Rule 86A.
Though in the aforesaid case the Hon’ble High Court did not interfere in the blocking of credit in that particular case but the anxiety of the court is pulpable and expressed in the following words:
62…….To this extent, the Government needs to look into the matter and issue appropriate guidelines and also lay down some procedure to be followed for the exercise of power under Rule 86A of the Rules.
Input tax credit is the backbone of the business and by blocking the legitimate credit the business suffers and growth of the nation is grossly affected. We can only hope that the government will prescribe some guidelines on urgent basis considering the wide ramification of the misuse of rule 86A of the Goods and Service Tax Rules in terms of the dicta given in S.S Industries (supra) which are as follows:
65…. (V) The Government needs to apply its mind for the purpose of laying down some guidelines or procedure for the purpose of invoking Rule 86A of the Rules. In the absence of the same, Rule 86A could be misused and may have an irreversible and detrimental effect on the business of the person concerned. In this regard, the Government needs to act promptly.
Authored by- Prabhat Kumar, Advocate – Rajesh Kumar & Associates