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Introduction: The Goods and Services Tax (GST) Act revolutionized India’s taxation landscape, aiming for a unified tax regime. Amidst this transition, Rule 86A emerged as a contentious provision, particularly concerning the negative blocking of the electronic credit ledger (ECL). Understanding its intricacies, conditions, and implications is crucial for businesses navigating the GST framework.

The Parliament in the 68th year of Republic of India enacted the Goods and Services Tax Act (in short ‘GST Act’) which is living up to the slogan ‘One Nation One Tax’. Number of taxing statutes like Central Excise Act, Value Added Tax, Entertainment Tax etc. are subsumed in the GST Act. There are 3 types of GST Act viz. Centre GST (CGST), State GST (SGST) and Integrated GST (IGST). The inter-state transaction is liable for IGST whereas intra-state transaction is liable for CGST & SGST. The CGST Act & SGST Act are pari materia in nature except some necessary change/amendment(s).

The Legislature to remove the cascading effect of tax has introduced the concept of input tax credit (in short ‘ITC’) int he GST Act. The concept of ITC was also available in the erstwhile Central Excise Act as well as in the VAT Act. The concept of ITC, therefore, is not a new concept in the GST regime.

Negative Blocking of Electronic Credit Ledger under Rule 86A GST Act

Section 16 GST Act deals with ITC. A registered person, in terms of Section 16 GST Act, is entitled to take/avail ITC. Section 16 GST Act provides conditional entitlement to take/avail ITC. Section 16 GST Act has 2 limbs. First limb i.e. section 16(1) GST Act provides that every registered person is entitled to take ITC which is subjected to conditions and restrictions prescribed under section 49 GST Act. First limb of section 16 GST Act, thus, has provided entitlement to take ITC. Second limb i.e. sub-sections 2 to 4 of section 16 GST Act which provide conditions to take ITC.

Section 49 GST Act has 2 parts. One part deals with electronic cash ledger whereas as second part deals with electronic credit ledger. Sub-section 2 of section 49 GST Act provides manner to take ITC in the electronic ledger. Sub-section 4 of section 49 GST Act provides manner to use ITC, lying in the electronic credit ledger, to utilize or to make payment towards output tax liability. Sub-section 5 of section 49 GST Act provides chronological manner to utilize the ITC to make payment towards output tax liability. Sub-sections 2, 4 & 5 of section 49 GST Act are as under:

Section 49 – Payment of tax, interest, penalty and other amounts

(1) xxxxx

(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with Section 41, to be maintained in such manner as may be prescribed.

(3) xxxxx

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions and within such time as may be prescribed.

(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of-

(a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;

(b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;

(c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

Provided that the input tax credit on account of State tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

Provided that the input tax credit on account of Union territory tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and

(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.

Section 49(4) GST Act provides that use of ITC lying in the ECL is subjected to prescribed conditions and restrictions. The Government, in exercise of power under section 164 GST Act, has made GST Rules to carry out the provisions of the GST Act. The Government, to carry out the provision of section 49(4), has made 2 Rules i.e. Rule 86A which provides conditions to use the ITC and Rule 86B which provides restriction to use ITC.

The Central Government vide Notification No. 75/2019-Central Tax dated 26.12.2019 w.e.f. 26.12.2019 has inserted the Rule 86A in the GST Rules book. A bare reading of Rule 86A GST Rules is providing conditions to dis-allow the debit of credit available in the ECL instead of providing conditions to use credit available in the ECL. Rule 86A GST Rules, thus, is a Rule in negative sense.

Rules 86A GST Rules has two parts. First and opening part of the Rule 86A (1) provides conditions to invoke the rule and second part provides consequences of invocation of the rule. Strict compliance of all the conditions provided in first part of the rule, thus, is very much necessary to invoke the rule. The strict compliance of all the conditions is very much necessary because power under Rule 86A is draconian in nature and have serious consequences. The first part of Rule 86A GST Rules has following mandatory conditions to invoke Rule 86A (1) GST Rules :

i) formation of reasons to believe by the commissioner or officer authorized not below the rank of assistant commissioner;

ii) formation of reasons to believe that credit of ITC available in electronic credit ledger is fraudulent or in-eligible because:

a) credit is availed on the basis of invoices or debit notes issued by supplier who is found to be non-existent or is found not to be conducting any business from place declared in registration; or

b) credit is availed on the basis of invoices or debit notes without receipt of goods or services or both in actual; or

c) credit is availed on invoices or debit notes in respect of which tax has not been paid to the government; or

d) registered person claiming credit is found to be non-existent or is found not to be conducting any business from place declared in registration; or

e) registered person availed credit without any invoice or debit note or any other valid document.

Second part of the rule has following consequences of invocation of Rule 86A(1) GST Rules :

i) disallowing debit of credit available in ECL;

ii) disallowance after recording reasons in writing.

Disallowance under Rule 86A GST Rules is provisional in nature and is contemplated during pendency of certain proceedings. An anticipatory disallowance, therefore, must be strictly confirmed to the requirements embodied in the Rule. The exercise of unguided power is impermissible in law, therefore, each of the ingredients embodied in Rule 86A (1) GST Rules must be strictly complied with before disallowing the debit/blocking of credit available in ECL. The Commissioner must be alive to the fact that such rule is not intended to authorize commissioner to make pre-emptive strikes on the credit of ITC available in ECL, merely because same is available for disallowance. There must be valid formation of reasons to believe that credit of ITC lying in ECL is fraudulently availed or ineligible because of reasons enshrined in Rule 86A (1) GST Rules.

Once commissioner, invoked Rule 86A GST Rules after complying with conditions prescribed under first part, has necessarily complied with conditions embodied under second part of Rule 86A GST Rules. The second part of Rule 86A is consequential, therefore, must be in conformity with first part of Rule 86A GST Rules. Necessity of reasons under both two parts of Rule 86A GST Rules is not a mere procedural formality but a safeguard to person against which Rule 86A GST Rules is to be invoked. Rule 86A GST Rules has serious consequence. The validity of power exercised under Rule 86A GST Rules, therefore, is to be tested on the basis of recorded reasons.

Rule 86A GST Rules empowers the Commissioner to exercise its authority thereunder. The Commissioner, in exercise of its authority under Rule 86A GST Rules, is blocking the electronic credit ledger (in short ‘ECL’) in following 2 manners:

i) input tax credit available in the electronic credit ledger (Positive blocking); and

ii) anticipated input tax credit which has to be availed in the electronic credit ledger (Negative blocking).

Today it is a burning issue that whether Rule 86A GST Rules empowers the Commissioner to negatively block the ECL. The issue is burning because the Commissioner, in exercise of its authority under Rule 86A GST Rules, is negatively block the ECL in routine as matter of course. The Commissioner, as per my view, has no authority under Rule 86A GST Rules, to negatively block the ECL.

One of the living slogans of the GST Act is ease to do the business. Negative blocking under Rule 86A GST Rules, however, is spoiling the slogan of ease to do business. The negative blocking under Rule 86A GST Rules is creating difficulties in carrying out the business in smooth and efficient manner. A person whose ECL is negatively blocked under Rules 86A GST Rules is unable to do its business and becomes a victim in the hands of the Rule 86A GST Rules. The person, in case of negative blocking of ECL, is forced to discharge/pay its whole liability including the ITC to the extent of negative blocking in cash. The recovery, in such circumstances, amounts to forced recovery and is contrary to mechanism provided under the Statute. The officers, in view of negative blocking, are acting to recover the alleged wrongly availed ITC in contravention to principles of natural justice, fairness and transparency. The negative blocking under Rules 86A GST Rules, thus, is acting towards the spoiling of the business instead of achieving the real object. The act of negative blocking under Rules 86A GST Rules is arbitrary and is against the rule of administrative law and public interest too.

Rules 86A GST Rules permits the Commissioner to disallow the use of credit available in the ECL. The expression ‘available’ in the Rule 86A GST Rules is of great significance and throws a light upon the object thereon of and intent of the government there behind. A scheme of the GST Act makes it evident that the government has no intent to include anticipated/probable ITC in the expression ‘available’ used in Rule 86A GST Rules. The expression ‘available’ use in Rule 86A GST Rules, as per scheme of the GST Act, means ‘existing’ only. The Commissioner, in my view, therefore, has no authority under Rules 86A GST Rules to block anticipated ITC which is not existing in the ECL. The act of blocking anticipated ITC in the ECL amounts to pre-determining the nature of ITC which would be available in the ECL in future. Such a pre-determination is based upon assumption and presumption which is not permissible in ours legal system. It is important to note here that the Hon’ble Gujarat High Court in case of Samay Alloys India P. Ltd. versus State of Gujarat, 2022-TIOL-246-HC-AHM-GST has ruled that the negative blocking under Rules 86A GST Rules is not permissible.

I, therefore, have a view that Rules 86A GST Rules does not empower the Commissioner to negatively block the electronic credit ledger to dis-allow the use of anticipated input tax credit.

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