Blocking of ITC Due to “Non-Genuine” Suppliers – Practical Challenges, Administrative Concerns & Need for Procedural Fairness
The GST regime was conceptualised on the promise of seamless flow of input tax credit (ITC). Section 16 of the CGST Act lays down clear conditions for availing credit. However, in practice, a significant number of genuine taxpayers—particularly in Maharashtra—are facing acute hardship due to blocking of ITC under Rule 86A on the allegation that their suppliers are non-genuine or involved in suspicious transactions.
While the objective of curbing fake ITC is legitimate, the manner of implementation has raised serious concerns within professional and trade circles.
1. The Typical Trigger for ITC Blocking
In most cases, ITC is blocked when:
• The supplier’s registration is cancelled (often retrospectively).
• The supplier is flagged during investigation as suspicious.
• The supplier fails to file returns or deposit tax.
• The supplier is alleged to be part of an invoice irregularity chain.
The immediate administrative action is blocking of credit in the electronic credit ledger under Rule 86A—without prior adjudication.
For the purchaser, the consequence is immediate working capital shock.
2. Practical Hardships Faced by Genuine Purchasers
(A) Working Capital Disruption
Blocked ITC means:
• No utilisation against output liability.
• Immediate cash payment of GST.
• Increased borrowing cost.
• Liquidity stress in ongoing contracts.
For SMEs and mid-sized enterprises operating on tight margins, even temporary blockage can derail operations.
(B) Burden Shifted to Purchaser Beyond Statute
In several cases handled by professionals, the purchaser has:
• Valid tax invoice.
• Payment through banking channels.
• Goods actually received.
• E-way bills and transport proof.
• Stock entries and consumption records.
• Reflection in GSTR-2B.
Yet, ITC is blocked solely because the supplier is later declared non-genuine.
Section 16 requires:
1. Possession of tax invoice
2. Receipt of goods/services
3. Tax charged on supply
4. Filing of return
The law does not require the purchaser to conduct forensic investigation into the supplier’s entire business operations. However, departmental practice often expects precisely that.
3. Procedural Concerns in Maharashtra – Industry Feedback
Among professionals in Maharashtra, recurring concerns include:
• Immediate invocation of Rule 86A without detailed reasoning.
• Absence of prior hearing.
• Non-speaking or cryptic orders.
• Delays in considering unblocking applications.
• Repeated adjournments without decision.
Even when taxpayers provide comprehensive documentation demonstrating physical movement of goods, matching turnover, commercial necessity of transactions, and banking trail of payments, relief is often delayed.
This creates a perception that purchasers are presumed complicit unless they conclusively prove innocence—reversing the burden in a manner not expressly envisaged under the statute.
4. March-End Revenue Pressure – A Systemic Risk
Within professional circles, there are increasing informal indications that officers face revenue collection pressure towards financial year-end.
If administrative recovery efforts are influenced by revenue targets, the risks include:
• Coercive recoveries prior to adjudication.
• Reluctance to unblock credit despite adequate evidence.
• Pressure to deposit amounts “to close the matter.”
• Mechanical confirmation of demands.
Tax administration must remain quasi-judicial in nature. Revenue considerations cannot override principles of natural justice, proportionality, and objectivity.
5. Rule 86A – Extraordinary Power, Ordinary Use?
Rule 86A was intended as a preventive measure in exceptional circumstances. However, its frequent invocation has led to:
• Long periods of blocked credit.
• Business disruption without adjudication.
• Increased litigation burden.
• Appeal-driven resolution rather than administrative correction.
Blocking credit effectively amounts to provisional recovery. If prolonged, it defeats the principle of seamless credit.
6. Risk Advisory to Businesses – No Shortcuts
Professionals must advise clients clearly:
• Avoid suppliers offering abnormal pricing.
• Do not engage in accommodation entries.
• Conduct vendor compliance checks periodically.
The consequences of wrongful ITC include tax demand, interest under Section 50, penalty under Section 74, prosecution in serious cases, and attachment of bank accounts.
The scale of GST demands in disputed ITC cases can exceed the financial capacity of many businesses.
7. Suggested Safeguards for Genuine Taxpayers
Strengthen Vendor Due Diligence:
• Verify GST registration status regularly.
• Monitor filing compliance.
• Retain vendor KYC documents.
• Maintain transport and delivery records.
Documentation Discipline:
• Preserve e-way bills.
• Maintain stock reconciliation.
• Ensure banking channel payments.
• Keep correspondence records.
Procedural Strategy:
• Respond comprehensively to notices.
• Seek personal hearing.
• Demand reasoned speaking orders.
• Escalate to appellate forums where necessary.
8. The Need for Administrative Balance
The objective of eliminating wrongful ITC is unquestionable. However, systemic rigidity harms compliant trade.
For a balanced ecosystem, the following are essential:
• Time-bound disposal of unblocking requests.
• Mandatory speaking orders before blocking.
• Clear guidelines on purchaser protection.
• Accountability for arbitrary invocation of Rule 86A.
• Separation of revenue targets from quasi-judicial decision-making.
Conclusion
Blocking of ITC due to alleged non-genuine suppliers presents one of the most pressing practical challenges in GST administration today.
Professionals and businesses must adopt stronger compliance mechanisms.
At the same time, tax administration must ensure that preventive powers do not become punitive tools.
The GST framework was built on the principle of seamless credit and ease of doing business. Safeguarding that principle is essential for the long-term stability of the tax regime.
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Author: CA. Raj Doshi
Disclaimer: The views expressed in this article are personal and intended for academic and professional discussion purposes only. This article does not constitute legal advice. Readers are advised to examine relevant statutory provisions, notifications, circulars, and judicial pronouncements before taking any action based on the contents of this article.
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Very helpful and insightful article!