Central Board of Indirect Taxes & Customs (CBIC) vide Notification No. 75/2019- Central Tax dated December 26, 2019 has made changes in Central Goods and Services Tax Rules, 2017 (CGST Rules). By which Rule 86A has been inserted after Rule 86 of the CGST Rules with effect from December 26, 2019. The said inserted provisions of Rule 86A in a nutshell grants power to the department to restrict the utilisation of the balance lying in the electronic credit ledger in certain circumstances.
The relevant portion of Notification No. 75/2019-Central Tax, dated 26.12.2019 is reproduced as under:
Page Contents
Rule 86A. Conditions of use of amount available in electronic credit ledger. –
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as
a) 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-
(i) issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
(ii) without receipt of goods or services or both; or
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; or
c) 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
d) 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, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilized amount.
(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.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.
Rule making power:
Before analyzing the inserted Rules 86A as cited above, it is necessary to know rulemaking power of the Government under GST. Section 164 of the CGST Act, 2017 has conferred rulemaking power by which the Government can make or amend the CGST Rules on the recommendations of the GST Council. The relevant portion of the CGST Act is reproduced as under:
Section 164 of CGST Act, 2017– Power of Government to make rules
“164. (1) The Government may, on the recommendations of the Council, by notification, make rules for carrying out the provisions of this Act.
(2) Without prejudice to the generality of the provisions of sub-section (1), the Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules.
(3) The power to make rules conferred by this section shall include the power to give retrospective effect to the rules or any of them from a date not earlier than the date on which the provisions of this Act come into force.
(4) Any rules made under sub-section (1) or sub-section (2) may provide that a contravention thereof shall be liable to a penalty not exceeding ten thousand rupees.”
In view of the above statutory provision, it is clear that the Government has rulemaking power under GST law. Accordingly, the amendment of rule 86A was brought by the Government is well within the provision of GST law. Thus, the Government is duely empowers to amend or make any rule under GST on the recommendations of the GST Council.
Authority of utilisation of Credit ledger:
Section 49(2) prescribes that input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger and Section 49(4) of the CGST Act, 2017 has duely authorised to taxpayers / registered person to utilise amount available in the electronic credit ledger towards payment of tax liability. The extract of the relevant Section 49(4) is reproduced as under:
“49(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 within such time as may be prescribed.
In light of the cited provision, proves that the authority is granted by the Act to the registered person by way of a delegated legislation concerning the utilization of the amount balance available in the electronic credit ledger subject to certain conditions but not complete blocking of credit.
Whether blocking of input tax credit is proper?
Rule 86A has prescribed complete blocking of utilization of credit balance in electronic credit ledger by the authorised officer in terms authority granted through delegated legislation. Whether the restriction of utilization of ITC is proper? To answer this it is better to understand the following principles about ITC.
> ITC scheme is the backbone of the GST regime, one of the main purposes of brining GST is that it would remove cascading effect by facilitating seamless flow of credit of tax paid on receipt of goods and services or both which are used or intended to be used in the course or furtherance of business at each stage of supply. Hence, restriction of utilization ITC is defeating the very purpose of seamless tax system in the country.
> Section 16 (1) of the CGST Act, provided every registered person shall, subject to such conditions and restrictions prescribed under Section 49 of the CGST Act, be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.
> Section 16 (2) of the CGST Act, specified the eligibility and conditions for taking input tax credit and once the registered person satisfy the conditions enlisted under Section 16(2), he is entitled to take credit in the electronic credit ledger in respect of supply of goods or services or both.
> The authority of utilization of credit provided under Section 49(4) is only the procedural conditions enabling the utilization of the balance amount in the electronic credit ledger and cannot be interpreted to restrict its utilization of ITC by virtue of inserted Rule 86A. Rule 86A restrict the utilisation ITC of eligible credit provided under Section 49(4) and thereby Rule 86A is going beyond the provisions of the Act and is thus ultra vires under article 14 of the Constitution of India.
> Assuming that the authority prescribed the conditions would include the power to restriction, it is to be seen that whether such power of restriction is reasonable or excessive delegation or law is proper? If law is unreasonable or excessive delegation is not permissible and rule made by the legislator would not be valid. If the legislative power is travelling beyond the purview of the statute in that case the same would not be valid and unconstitutional one. In this ground also Rule 86A is not valid and unconstitutional. Rule 86A travels beyond the purview of statute and contradictory to Section 49(4) of the CGST Act, 2017.
> Rule making authority exercises absolute power without following of principles of natural justice directly inserted provision for blocking the utilisation balance of credit in the electronic credit ledger. There is clear case of violation of principles of natural justice.
> ITC is the vested right of the taxpayers and rule making authority change the policy to blockage of electronic credit ledger would be a case of denial of vested right of the taxpayers hence it can be stated that the Rule 86A is not just and proper. There is general rule-making power under Section 164(2), it cannot be exercised to take away substantive rights of the taxpayers.
Importance of Reasons to believe:
Rule 86A (1) prescribed that having “reasons to believe” that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as in the given circumstances. It is to be mentioned that the Officer is required to exercise his power under this provision have to be “reasons to believed” that the taxpayers have availed tax fraudulently or ineligible credit in the following circumstances as summarized in the below table and he is ready to provides the details of reasons for the same in writing so that Rule 86A can be invoked to restrict utilization of ITC.
| Clauses to Notification | Circumstances where Officer has to exercise his power to block credit. | Reasons requires to be recorded in writing. |
| (a) (i) | 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-
(i)issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or |
The Officer exercising power under this rule should keep recorded in writing from the genuine facts that the supplier is non-existent or not conducting business from his registered place but issued invoices or debit notes. |
| (a) (ii) | without receipt of goods or services or both; or | Secondly, the Officer has to record reasons in writing that the goods or services have not been received by the taxpayers but availed ITC only in the strength of invoices or debit notes issued under rule 36. So that he can able to invoke of block of utilisation of ITC. |
| (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; or | The Officer has to carry scrutinize with regard to non-payment tax to the Government by the suppliers and reason to be recorded in writing that tax charged on supplies but not paid to the Government, So that he can be invoked this provision to blocked of utilization of ITC as per notification. |
| (c) | 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 officer has to recorded in writing the genuine reasons with regard to taxpayer has availed ITC on the strength of invoices or debit notes and having non-existent or not conducting business from the registered place of business and transaction was not genuine so that he can be invoked the provision only to block of utilisation of ITC as per notification. |
| (d) | 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, | The Officer has to recorded in writing the reasons that registered person has no physical possession of duty paying documents and tax invoices or debit notes or any other document as prescribed under rule 36 so that he can be invoked to block of utilization of ITC in the electronic credit ledger. |
In light of the cited analysis of circumstances as well as clauses of the notification under Rule 86A has emphasized that the requirement of recording the reasons in writing by the authorised officer for blocking of utilization of ITC in the electronic credit ledger and communicating such reasons to the taxpayer whose electronic credit ledger is sought to be blocked is in line of principles of natural justice. By which the taxpayers can able to be challenged in courts against unreasonable exercise of the power by the authorised officer.
Case Laws:
The Hon’ble High Court of Orissa in the case of State Collector of Central Excise v. Tapan Kumar Shome, reported in 1984(18) E.L.T. 278 ( Orissa), held that “ As provided in section 135 of the Act, a person must have the requisite knowledge or must have reasons to believe that the property is liable to confiscation. The word believe is a stronger word than suspect and it involves the necessity of showing that the circumstances are such that a reasonable man must feel convinced in his mind that the property with which he is dealing or is in possession is liable to confiscation under section 111 of the Act. It may not be sufficient to say that the accused is careless or that he has reason to suspect that the property is liable to confiscation.”
The Hon’ble Supreme Court in the case of Union of India vs. Mohan Lal Capoor & Others 1974 SCR (1) 797 (SC) , held that “ reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Therefore the reasons leading to the exercise of the power granted by the Rule must be based on rational nexus and not on any conjecture or surmises. The reasons recorded must be relevant and germane to the content and scope of the power conferred by the statute and must show a reasonable nexus between the facts considered and satisfaction reached.”
The Hon’ble Supreme Court in the case of Ajantha Industries And Ors vs. Central Board of Direct Taxes 1976 SCR (2) 884 (SC) held that “the requirement of recording the reasons as a matter of principle of natural justice would also encompass the requirement of communicating such reasons to the taxpayers to enable the taxpayer who is prejudicially affected to challenge the decision.”
The Hon’ble High Court in the case of Mapsa Tapes Pvt. Ltd. v. Union of India reported in 2006 (201) E.L.T.7 ( P & H) , held that “ while existence of power of seizure may be justified but its exercise will be liable to struck down unless ‘reasons to believe’ were duly recorded before action of search and seizure is taken. The High Court held as nothing was produced before the Court to show as to whether reasons were recorded or not before search was authorized as seizure took place, action of search and seizure is liable to be quashed. This case was maintained by the Hon’ble Supreme Court reported in 2008 (225) E.L.T. A95 (S.C.)”
Conclusion: Therefore, Rule 86A (2) prescribes that the Officer so authorised have to reasons to believe , such reasons to be recorded in writing and not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any output tax liability under section 49 or for claim of any refund of any unutilized amount, if he founds that circumstances mentioned at clauses (a) (i), (a) (ii), (b), (c) and (d) under Rule 86 (1) and he can be invoked to block of ITC. Further, Rule 86A (3) prescribed that the restriction imposed shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction. Therefore, the Officer so authorised and power granted under Rule 86A requires to be exercised by him very carefully and with utmost caution. Though it is temporary exercise to control illegal ITC, but there is ample of scope available with taxpayers in case of unreasonable findings to blocking of ITC may be challenged before the Courts to get relief from the illegal imposed of restriction of utilization of ITC by the Department.
Author Bio
It reminds me of pari materia provisions under erstwhile regime issued vide Notification 30, 31 and 32 /2006-CE (NT)