One of the standout features of the Goods and Services Tax (GST) system in India is the concept of Input Tax Credit (ITC). ITC allows a buyer to claim credit for the tax paid to the seller, thereby eliminating the cascading effect of taxes and curbing tax evasion. However, over time, the misuse of ITC by some buyers and sellers through fraudulent practices has led to significant revenue leakage for the GST department. Sellers issuing fake invoices, and buyers availing of ITC without genuine transactions have become quite a menace. To address this issue, the government introduced Rule 86A under the Central Goods and Services Tax (CGST) Rules, 2017, which allows for the blocking of ITC. While this rule is effective in curbing tax evasion, it has also caused considerable hardships for genuine taxpayers.
In this blog, we will explore the provisions of blocking and unblocking ITC, the impact on taxpayers, and the remedies available to taxpayers under GST law.
Understanding Rule 86A: Conditions for Blocking ITC
The government introduced Rule 86A to prevent the misuse of ITC obtained through fraudulent means. This rule outlines the conditions under which the GST department can block ITC. Here are the key points:
1. Authority to Block ITC
The power to block ITC under Rule 86A lies with the Commissioner or any officer authorized by him. Such an officer should not be below the rank of Assistant Commissioner.
2. Reasons to Believe
The officer must have ‘reasons to believe’ that the taxpayer has fraudulently availed of ITC. This decision cannot be based on mere suspicion; it must be supported by substantial evidence.
Gujarat HC in the case of S.S. Industries Vs. UOI (2020) held that:
- The concerned authority should invoke Rule 86A only on the basis of cogent and credible material, not on vague or insufficient grounds.
- The officers must use the power under Rule 86A sparingly and only on substantial grounds with strong reasons.
- Authorities should not use Rule 86A as a tool to harass taxpayers.
3. Specific Conditions for Blocking ITC
- When the supplier who issued the invoice or debit notes is non-existent or not conducting business from the registered address.
- If the registered person avails of credit on invoices or debit notes but does not actually receive any goods or services.
- Where the supplier fails to pay the collected tax to the government, ITC in respect of such tax is eligible for blocking.
- If the buyer claiming ITC is either non-existent or not conducting business from the registered address.
- In cases where the buyer does not possess any valid invoice, debit note, or other supporting documents.
Read more:- Input Tax Credit (ITC) under GST: Understanding ITC Eligibility and Reversals
Hardships Faced by Taxpayers Due to Blocking of ITC
There have been incidents where buyers collude with sellers to claim ITC fraudulently. In such cases, provisions like blocking of ITC under Rule 86A become necessary. However, when non-compliance is solely on the seller’s part, honest buyers must also bear the brunt of it. Blocking of ITC creates significant challenges for such buyers, such as:
1. Unjust Re-blocking of ITC:
In practice, officers sometimes unblock ITC when they are unable to complete proceedings within the stipulated one-year period, only to re-block it later. This repeated blocking and unblocking of ITC is unfair and causes severe financial strain on taxpayers.
2. Lack of Information about Fraudulent Dealers:
It is difficult for taxpayers to identify whether a dealer is genuine or fraudulent, especially when the department has already granted registration. Moreover, the responsibility of verifying the authenticity of the dealer’s documents should lie with the department, not with the taxpayer. When a dealer is later found to be fraudulent, the taxpayer who claimed ITC in good faith is unfairly penalized.
3. Cascading Effect Due to Supplier Default:
When a supplier defaults on tax payment, the ITC claimed by the buyer is restricted. This creates a cascading effect of tax. The buyer, who has already paid tax to the supplier, is forced to bear the tax burden again when denied ITC. As a result, both the cash flow and financial planning for the buyer disrupts.
4. Impossibility of Predicting Supplier Default:
It is nearly impossible for a buyer to cross-check or predict whether a supplier will default on tax payments. As a result, buyers assume that once tax is paid to the supplier, the supplier will fulfill their obligation to pay the tax to the government. However, when the supplier fails to do so, the buyer is unfairly penalized, despite having no control over the supplier’s actions.
5. Inability to Enforce Compliance on Suppliers:
As a buyer, you cannot force a supplier to file returns or pay taxes on time. Even if you have fulfilled all your obligations, you are still at risk of having your ITC blocked if the supplier fails to comply. As a result, honest taxpayers are left to deal with the repercussions of another party’s non-compliance.
Rights of taxpayers in case of Blocking of ITC under 86A
There have been several landmark cases that have curtailed the misuse of Rule 86A by officers. Courts have directed GST officers to operate strictly within the boundaries of the law. Additionally, the department has issued guidelines periodically to ensure the proper implementation of Rule 86A.
GST officers must adhere to the following guidelines when invoking the blocking of credit under Rule 86A:
1. The concerned officer must duly record the “Reasons to believe” in writing before disallowing any debit from the electronic credit ledger.
2. The blocking of credit in the electronic credit ledger should not exceed the amount of input tax credit fraudulently availed. Additionally, the disallowed amount should not surpass the amount currently available in the ITC ledger. There cannot be negative blocking of ITC, and future ITC cannot be blocked.
3. When an officer disallows the debit from the electronic credit ledger, the taxpayer must be informed through the portal. Along with this, the details of the officer responsible for the disallowance should also be updated.
Gujarat HC in the case of Samay Alloys India Pvt. Ltd. vs. State of Gujarat (2022) held that:
1. The rule empowers proper officer to disallow only the fraudulently availed credit and not the entire credit in Electronic Credit Ledger
2. Rule 86A does not restrict a person from utilizing future credits on Electronic Credit Ledger
3. Rule 86A is not the only remedy for fraudulent credit utilization. The Government can also initiate proceedings under section 73, cancel registration under section 29 or provisionally attach property under section 83 of CGST act, 2017
Provisions for Unblocking ITC Under Rule 86A
Sub-rule 2 and 3 of Rule 86A lays down provisions for unblocking ITC which provides some relief to taxpayers. These provisions are:
1. If the Commissioner or the authorized officer is satisfied that the conditions for blocking ITC no longer exist, they can allow the debit of the electronic credit ledger. However, they should record the reasons for allowing such debit in writing.
2. The restriction on ITC blocking ceases after one year. The department must complete the proceedings within this period.
Delhi HC held in case of Krishna Fashion vs. Union of India & Ors. (2022)
Rule 86A, does not permit blocking ITC in the Electronic Credit Ledger after the expiry of one year. Similarly, Section 83(2) of the CGST Act does not authorize the continuation of provisional attachment of property beyond one year.
Remedies Available to Taxpayers
Blocking of ITC can be severely disruptive for honest taxpayers, causing working capital issues, double taxation, and significant inconvenience.
To address ITC blocking, taxpayers can utilize the following remedies:
1. Insist the Department in completing adjudication proceedings within the time frame:
Taxpayers must insist the department to complete the proceedings promptly within the time frame of one year. If the result of adjudication proceedings is not in favor of the taxpayer, they can file an appeal against the order.
2. Legal Recourse against Blocking of ITC :
If the ITC remains blocked without sufficient justification, taxpayers can seek legal recourse through the courts. Incidentally, the courts have been sympathetic to genuine taxpayers. Often, they have often directed the department to unblock ITC when the blocking was unjustified.
Conclusion
The concept of blocking and unblocking ITC is a complex issue. While it is necessary to prevent tax evasion and fraud, it also poses significant challenges for honest taxpayers. Hence, the government must strike a balance between preventing fraud and protecting the rights of genuine taxpayers. Clear guidelines, timely completion of proceedings, and transparency in decision-making should be in place to ensure that the blocking of ITC does not become a tool of harassment. Also, taxpayers should be aware of their rights. They should not hesitate to seek legal recourse if they believe they are being unfairly penalized.
