Rule 86A, inserted vide notification no. 75/2019 – Central Tax dated 26.12.2019 empowers the authority to block the ITC available under electronic credit ledger. As per rule 86A, authorities, if they have reason to believe credit of ITC available in electronic credit ledger has been fraudulently availed or is ineligible, may block the credit available in electronic credit ledger to the extent of equivalent amount.
As far as where purchaser has fraudulently availed the ITC by being in connivance with the seller, said rule is a welcome step. However, what is more concerning is clause (b) of sub-rule (1) which empowers the officer to even block the credit in cases where the seller has failed to file its return nor paid taxes. Thus, by insertion of sub rule 1(b), Officer has the power to block the ITC equivalent to amount of mismatch between ITC claimed in 3B and available in 2A.
Already, the government had inserted sub-rule (4) to rule 36 w.e.f 09.10.2019, whereby it has restricted ITC in respect to invoices not uploaded by the seller to the extent of 20% of the ITC in respect to invoices uploaded by seller. W.e.f 01.01.2020, the same is further reduced to 10%.
Rational behind insertion of rule 86A is unclear when already rule 36(4) restricts the availment of credit in respect of invoices not uploaded. It only gives power to authorities to block the unmatched credit in respect of period prior to insertion of said rule.
Expecting genuine purchaser without any machinery available to ensure, in order to avail ITC, seller files and pay taxes is not only egregiously arbitrary, detrimental but also unconstitutional, Wherein the Government itself has kept in abeyance the concept of GSTR 2 & 2A. Also, as per S.76 & S. 79, authorities have all powers to recover the taxes from any person who has collected the tax but not paid the same to Government.
The above has also been uphold in the various judicial pronouncements. Delhi High Court in the case of Arise India Limited has held that purchasing dealer cannot be expected to keep track of whether the selling dealer has in fact deposited tax. Further, court also held that department is not helpless if selling dealer commits a default. Apex Court has dismissed the petition of revenue filed against the aforesaid decision of Delhi High Court.
Similar views have been expressed by Punjab & Haryana High Court in case of Geru Lal Bal Chand V. State of Haryana & Karnataka High Court in case of M/s. Onyx Designs
Blocking of ITC available without giving any intimation is against the fundamental principle of natural justice. If no necessary directive is given to the officer that power entrusted under rule 86A shall be used only in exceptional cases of bogus/fake invoice, the same will only create unrest to genuine tax payers who has in full faith made payment of invoice along with taxes to seller and also is not allowed to claim credit of such taxes paid.
(The view expresses here are opinion of the Author. For any further queries, the author can be reached at following Email id: Chhedand@gmail.com)