Rule 86A, the ambient hullabaloo there and usability of inadmissible ITC- the lessly said aspect
The spurious input tax credit came out to become the much talked about menace ever since the GST rolled out. The ITC-mongers kept consistently bugging the novel Act as reports keep showing in news. As on January 2021 around 27000 GST fraud case reported across the country. The section 41 provides for the provisional acceptance of the ITC subject to matching reversal and reclaim etc. thereof under Section 42 and matching, reversal, reclaim of reduction in output tax liability under section 43 whereas the burden of proof under section 155 keep lying on the taxable person.
Implying thereby, the taxable person needs to self ascertain (as most of the tax compliant tax base would) and append the amount of the available ITC in Table -4(C) in the monthly return in Form GSTR-3B as postulated under section 41. The tax evaders through such firms based only on the common portal, take the pretext of the provisional acceptability of the ITC and incognizance of the fraudulent nature of their supplier. The point however, remains that acceptance of ITC is provisional, with section 42, 43 and 155 for fulfillment prior regularization.
In the scenario where tax base is being unascertainably plagued by the ‘counterfeit input tax credit’, the blocking of such uncredulous ITC under Rule 86A has been a critically censured instrument left in the hands of the tax officer. The Rule having come into force on 26.12.2019 can be invoked, exercised and revoked for reasons.
In the below given illustration;
ABC Company declares to have sold the goods to XYZ Company worth ₹1,18,000 and collection of ₹18000 for payment to the Government. The company ABC in turn declares the inward supplies from and payment of ₹18000 to some other business say JKL Co. which has been proved to be non -existent or has not filed returns in Form GSTR-3B . A corroborative record of e-way bill, payment against the supply, toll receipt etc. are generated or maintained by both the businesses viz. JKL Co. and the ABC Co. to substantiate their say on the admissibility of ITC so involved. While paying tax liability of ₹18000, ABC Co. uses amount equivalent to the bogus ITC from JKL Co. in contravention to Section 16(2)(c) which relevantly provides that
“subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.”
The Company XYZ, whereas, avails the input tax when the same has started reflecting in the electronic credit ledger the sooner ABC Company files its GSTR-1. Giving way to the illustration further, let us suppose, the Proper Officer under GST, takes cognisance of the contravention and blocks the ITC so far lying inadmissible on account of inward supplies from JKL Co.in the electronic credit ledger of the XYZ Company in exercise of preconditions under Rule 86A after intiating case proceedings against the recipient.
The case proceeding on further adjudication by the Proper Officer, if proves the collusive intent of the recipient and supplier i.e. XYZ Co. and ABC Co., the Proper Officer after according opportunity under Section 75(4) for absolvance from the burden of proof under Section 155, on being convinced can; adjudicate the case by imposing liability under section 74 (1) and (9).
In this case XYZ Company is availer of ITC wrongful owing to unsatiated condition under Section 16(2)(c) or even 16(2)(b) in the light of findings of investigation of JKL Co. to be non-existent, even if corroborative evidence like e-way bill, weighment slip etc. keep claiming.
The liability of XYZ Company therefore arising is of ;
(1). tax of ₹18000, as the tax collected from XYZ Co. was not paid through admissible ITC by ABC Co. and,
(2). penalty of ₹18000 under Section 74(9) subject to fulfilment of conditions under Section 74(5) ,(8) &(11) and,
(3). that of interest imposable under Section 50, for the delay ad default caused to the Government vide (1).
The point to raise however, becomes that if XYZ , finding ABC alienated to the concern, accedes to pay the demand of tax , interest and penalty; should be allowed to utilise the amount of blocked ITC in the illustration amounting ₹18000, on its representation. Commonly it is found opined by the taxpayer as well as by the tax authorities that disallowing the blocked ITC would amount to double taxation and the blocked ITC is used by the adjudicated assesse in paying off the liability of demand under Section 74 as illustrated or in filing of returns. In this scenario it is worth bearing in mind that,
(A). the claim of ITC showing in the electronic credit ledger in Form GST PMT-02 is barely a figure reflecting there due to appending of the self -ascertained ITC amount of ₹18,000 in Table-4(C) of GSTR-3B return. The appended amount could have been ₹180,000 or even ₹1,80,00,000 in the same scenario, despite the fact that actual input tax involved is ₹18000. The bottom-line is that this figure of ITC standing disallowed or blocked is a claim which upon investigation or inspection of record stood unsubstantiated. This unsubstantiated claim of ₹18000 showing in the electronic credit ledger of XYZ Company, is NOT the tax paid in the scenario under illustration, in contravention to provision of Section 16(2)(c) and, or (b).
(B). the input tax credit of ₹18000, so reflecting in the electronic credit ledger if unsubstantiated as in this case, amounts to following synonyms viz. counterfeit-ITC, false claim, tax-void, ‘tax not paid’, ‘tax-default’ etc. meaning thereby the tax claim is posing as a tax-void in the ITC chain. The tax-void best suits the example here.
Therefore, a tax-void of ₹18000 is present in the electronic credit ledger of XYZ Company (for its singular assessment) requiring replenishment by an equivalent tax amount of ₹18000 under the tax head, followable by interest of delay thereupon alongwith punitive amount endorsed under section 74.
In the discussed case, allowing the assesse the utilisation of ₹18000 in the electronic credit ledger (representing false tax claim of ₹18000 or the tax-void of ₹18000) shall degrees the liability statutorily imposable under Section 74. Also would that underassess and reduce the liability of tax through an amount of 18000 of ineligible ITC so allowed in paying the liability.
Further, allowing the unsubstantiated figures of claim in the electronic credit ledger in paying the tax liability according to Rule 85(4), would certainly cause a constitutive aberration or conflict with Section 16 (2)(c), thus polluting the sincere tax chain forwards.
The Rule 86A inserted on 26.12.2019 desires to desist the utilisation of wrongful claims of ‘input tax payment’ as selectively stating it hereinbelow in Rule 86(1)(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; “
The provision indeed is consonant with the regulatory Section 16 whereby only admissible ITC or cash have to be the modes of payment. Dwelling further on extract of Rule 86A (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”
The condition of such fulfilment arises only when;
(i) the supplier having defaulted the tax amount under Section 16(2)(c) has paid the due tax, interest and penalty accruable for such act of default under Section 74 but,
(ii) also the goods must have been received by the recipient with consent to precondition under Section 16(2)(b), meaning therefore, the supplier despite has paid due tax accruable on the questioned supply under adjudication, but if has not supplied the goods, can not satiate condition under Rule 86A(2). The recipient in this case is liable to be imposed with liability tantamounting to that provided under Section 74.
The Rule 86A(3) stands out further to read that;
“Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
In the absence of an express instrument or laid down fate of the wrongfully availed ITC, assuming the principal Section 16 to be surmounting and regulatory in allowance of ITC, presence of Rule 86A(2) coupled with sub Rule(3), can not even then be deemed to override the principal clauses of ITC under Section 16.
The input tax credit, only subject to fulfilment of conditions under Section16 is admissible. Rule 86A(3) providing for the expiry of blocking of ITC after one year but can not reach out to deconstitute the formation under the principal ITC clauses given in Section 16.
Notwithstanding what provided under Section 16, the blocking therefore, within provisions of Rule 86A, has to last for a spell of one year as given for, but ought to be instrumentalized by redoing if condition under Rule 86A(2) has not been met and the case is under proceeding under Section 74, 107, 108 117 or 118 or till the currency of time limit of these sections has not expired. Given that, the orders of adjudication of such blocking of ITC not currently provided, an order either incorporated within regular order of adjudication under Section 74(9) if decided within one year from date of blocking, or separate orders within one year are required to be issued and provisioned separately in the rules.
Conclusively the inadmissible ITC must not be part of recovery under Section 78, and Rule 86A(3) providing for the release of blocked ITC after one year necessarily has not overruled the qualifying condition under Section 16 under the Act. The impasse within the far ends is there for paving.