Brief on insertion of Rule 86A

A writ petition was filed in 2019 in Alfa Enterprise v. State of Gujarat, against the blocking of credit ledger in the High Court of Gujarat. The Hon’ble High Court held that the blocking of the credit is not backed by any statutory provision under the CGST Act or Rules prescribed and directed the revenue to unblock the credit ledger. After this decision, the CGST Rules were amended and Rule 86A was inserted to empower a Proper Officer to block a credit ledger on the basis of the grounds provided therein.

Conditions for which a electronic credit ledger can be blocked by an officer

The Commissioner or Officer Authorized by him in this behalf, not below the rank of Additional Commissioner having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible, may reasons to be recorded in writing  restrict the use of Input Tax Credit from the credit ledger of an assessee in the following circumstances:

Where credit has been availed on the basis of Tax Invoices or Debit Notes or other documents prescribed in Rule 36:

  • Issued by a registered person who has been found to be non-existent or not to be conducting business from his place of registration, or
  • without the receipt of goods or services or both.,or
  • the tax charged in respect of which has not been paid to the Government; or
  • 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
  • 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,

Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

Hardship on the taxpayer

Rule 86A is unilateral and un- constitutional as it allows officers to take action without giving the assessee an opportunity to being heard. The right to avail and utilize ITC for discharging tax liability is a legal right arising from the statute and none of the provisions contained in Section 16 or any of the other sections under the CGST Act empower the government to block ITC under any circumstances.

Blocking the credit without giving the assessee an opportunity to being heard would impact the cash flow of the genuine taxpayers. To curb the frauds, its should not hardship on the genuine taxpayers.

Even there is no remedy to taxpayers for the unblocking of their credit ledger and it is left to the department of revenue and their discretion. So only option available with the taxpayers is to challenge in the court of law. Therefore, an action of blocking credit ledger is violation of principles of natural justice.

Even there is no compensation by the department in terms of interest for blockage of cash flow, if assessee is found bonafide.

However Surat Mercantile Association has filed a petition before the Hon’ble Gujarat High Court

challenging the constitutional validity of Rule 86A of the Central GST Rules and the  

Gujarat GST Rules and Hon’ble Gujarat High Court has issued notice to the Central and State      

Government to submit its response by 21st January, 2021.

Relaxation in rule 86A required to be included  

Giving the assessee an opportunity to being heard before blocking of ITC credit and after being satisfied that there is wrongful availment of ITC.

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