Understanding CGST Rule 86A on Input Tax Credit
Rule 86A of the CGST Act empowers tax authorities to block fraudulently availed Input Tax Credit (ITC) to protect government revenue. This measure can be enacted when there are clear reasons to suspect ineligible or false ITC claims, such as those from non-existent suppliers or without actual supply. While taxpayers have a legal right to ITC, this rule, introduced under Section 164, provides a legal basis for restriction. The blocking of ITC under Rule 86A automatically ceases after one year.
To safeguard government revenue, Rule 86A was established by the authorities to prevent the fraudulent utilization of Input Tax Credit (ITC).
What is CGST Rule 86A?
Government Notification no. 75/2019 dated 26.12.2019 brought Rule 86A into effect to counteract the misuse of Input Tax Credit (ITC). This regulation permits a Commissioner or their designated officer to suspend a taxpayer's electronic credit ledger if there are credible grounds to suspect fraudulent ITC claims. The official must document these reasons in writing.
Conditions for Blocking ITC in the Electronic Credit Ledger
An authorized officer, at or above the rank of an Assistant Commissioner, can block a taxpayer's ITC if there is a reasonable belief that the credit is fraudulent or ineligible. The conditions for such action include:
- Tax invoices supporting the ITC claim were issued by a non-existent registered person or one not operating from the registered business location.
- The claimed ITC relates to an invoice for which no goods or services were received.
- The tax on the invoice supporting the ITC claim has not been remitted to the government.
- The registered person claiming ITC is either non-existent or not conducting business from their registered address.
- The taxpayer lacks the proper invoice or debit note required for claiming ITC.
The Commissioner has the discretion to restore the credit if the conditions justifying its blockage are no longer present.
Legality of ITC Blocking by GST Officers
Under Section 16(1) of the CGST Act, registered taxpayers are entitled to claim ITC on taxes paid for inward supplies used in their business, subject to conditions outlined in Section 16(2), (3), (4), and Section 17. While claiming and utilizing ITC for output tax liability is a taxpayer's statutory right, this right can only be restricted by explicit legal provisions.
Neither Section 16 nor Section 17 of the CGST Act explicitly grants the government power to block ITC. However, Section 164 of the CGST Act authorizes the government to enact rules for implementing the Act's provisions. Exercising this power, the government introduced Rule 86A, which specifically grants the Commissioner the authority to block ITC.
Scope of Rule 86A
Rule 86A grants tax officers the legal authority to block ITC if it has been fraudulently claimed. Invoking this rule necessitates objective 'reasons to believe' that ITC was improperly utilized, supported by relevant documentation. Without valid grounds, the application of Rule 86A could be deemed malicious.
This rule's application can be further understood through a Gujarat High Court judgment.
Gujarat High Court Ruling on Rule 86A
In a particular case, an assessee challenged the tax authority's right to block ITC under Rule 86A during an ongoing investigation. The tax authority contended that the petitioner was claiming ITC based on invoices from a supplier under investigation for issuing invoices without actual goods supply. The authority subsequently demanded a cash deposit and blocked the assessee's credit ledger, later refusing a refund and maintaining the blockage. The assessee filed a writ petition with the Gujarat High Court, arguing:
- GST on inputs was paid via real-time gross settlement, and final products were manufactured with these inputs, with GST duly paid.
- The tax authority provided no proof that inputs were not received.
- GSTR-3B was filed promptly, and no ITC disputes were raised by the authority previously.
The Court ruled that Rule 86A of the CGST Rules can be invoked during inquiries or investigations. It clarified that availing and utilizing ITC are distinct stages, meaning a taxpayer does not acquire a vested right before the credit is taken. Furthermore, the Court emphasized that Rule 86A requires a demonstrable 'reason to believe' that ITC was fraudulently claimed, supported by documented evidence and thoughtful consideration. Without such justification, the exercise of this power would be considered abusive. In this specific instance, the Court concluded that the investigation and ITC blockage were neither malicious nor unsupported by evidence.
When does ITC Blocking under GST Cease?
The restriction on ITC utilization is lifted automatically after one year from the date it was imposed.