Rule 86A – GST department can block the ITC ledger
Rule 86A was inserted in CGST Rules,2017 vide a CGST Notification no. 75 dated 26th December 2019.
What is Rule 86A?
Rule 86A of CGST Rules,2017 empowers the GST Department to block the utilization of the ITC available in the electronic credit ledger if the proper officer is satisfied and has reasons to believe that ITC is availed fraudulently or is ineligible.
Note: It is advisable that while making amendments to Laws & Rules, Government also lays down a comprehensive list of reasons which can lead to such beliefs by the proper officer.
Why was Rule 86A introduced?
After the rollout of GST, Government has miserably failed to curtail the fraudsters from issuing fake tax invoices, furnishing returns for outward supplies without actual payment of tax liability, utilizing fraudulent credit, ineligible credit, etc.
In order to curb tax evasion and stop the menace of tax evasion, the Government has introduced Rule 86A which gives drastic power to Revenue to block the utilization of credit available in electronic credit ledger.
Who will be considered as the proper officer to block the electronic credit ledger?
- A Commissioner
- An officer not below the rank of an Assistant Commissioner who is authorized by Commissioner in this behalf.
When can the Proper Officer block the electronic credit ledger?
If the Proper Officer has reasons to believe & upon being satisfied that the input tax credit available in the electronic credit ledger is
- Fraudulently availed
However, the Proper Officer will have to record the reasons in writing before exercising this power.
What can be the reasons which will lead the Proper Officer to believe that the ITC is fraudulently availed or is ineligible?
If the Proper Officer has reasons and is satisfied that ITC was either fraudulently availed or is ineligible based on the following findings: –
1) The taxpayer intends to avail of the ITC on basis of tax invoices or debit notes or any other document as per rule 36 without actual receipt of goods or services or both.
2) The taxpayer intends to avail of the ITC on basis of tax invoices or debit notes or any other document as per rule 36 without payment of tax to the Government.
(Note: As GSTR-1 and GSTR-3B are not completely linked with each other, it is not possible for a taxpayer to justify that the tax is paid by the supplier or not in respect of invoices or debit notes for which ITC is sought).
3)The taxpayer intends to avail of the ITC on basis of tax invoices or debit notes or any other document as per rule 36 without the actual possession of the valid document.
(Note: Authorized Officer shall record the reason in writing for above and shall not allow refund or utilization of credit of equivalent amount for the discharge of liabilities)
4) ITC is availed on basis of tax invoices or debit notes from a non-existent supplier of goods or services (supplier doesn’t conduct any business from any place for which registration was taken).
5) The taxpayer who intends to avail of the ITC is a non-existent recipient of goods or services. (Recipient doesn’t conduct any business from any place for which registration was taken).
What is the maximum period for which authorized officer can block/restrict the utilization of ITC?
The maximum period of restriction shall be one year from the date where such restriction was imposed by the authorized officer.
Is Rule 86A is ultra virus to law?
Rule 86A is a draconian, arbitrary, irrational, and unduly harsh provision as it gives Revenue the power to impose the restriction
⇒ Without issuing a show-cause notice u/s 74 of CGST Act 2017.
⇒ Without giving the taxpayer an opportunity of being heard u/s 75 of CGST Act 2017.
⇒ It also circumvents the right of appeal to the extent that such right can be exercised upon payment of 10% of the disputed amount u/s 107 of CGST Act 2017.
The government should be mindful of the fact that CGST Rules cannot override the CGST Act.
Ongoing matter of litigation
Gujarat High Court has observed that Rule 86A challenges the constitutional validity of Section 16(2)(c) of the CGST Act,2017, and issued notice to the Attorney General of India.
In my opinion, Government should exercise the above drastic powers cautiously and sparingly as all the taxpayers are not fraudsters or dishonest. Generally, the fraudsters play with the loopholes of the law and keep maximum documental evidence in place leaving no trail behind to be caught. It is the honest and genuine taxpayers who become the victim of such harsh provisions and face the consequences for no-fault of theirs.
Instead, Government should take some serious steps towards the implementation of the robust return filing system which was planned at the initial stage of GST rollout.
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