Blocked Credits as per Rule 86A of CGST Rules

Blocking of Input Tax Credit in Terms of new Rule 86A of the CGST Rules

With Effect from 26.12.2019 Rule 86A was inserted in the Central Goods and Service Tax Rules, 2017(herein after defined as CGST Rules) which was notified through Notification (Central Tax ) No 75/2019, stating the condition to use Input Tax Credit available in the Electronic Credit Ledger (hereinafter defined as ‘ECL’).

Rule 86A offers capacity to Commissioner or Officer Authorized for his sake, not beneath the position of Additional Commissioner, to confine the utilization of Input Tax Credit from ECL.

Further limitation will stop to have impact after expiry of time of one year from the imposition of date of such limitation.

Rule 86A of CGST Rules was introduced for Fraudulent, Bogus or Irregular GST credit by the Recipients.

Before presentation of the Rule 86A of CGST Rules there has been where Credits were obstructed by Officer without giving any substantial explanation, or without giving show cause notice or giving chance of being heard to them. In this manner Rule 86A was explicitly presented in CGST Rules, in order to offer forces to Officers for Blocking of Credits.

Cases where Restriction can be imposed by the Officer:-

• Where Officer has a reason to believe that Credit has been Fraudulently availed or is ineligible to avail Credit
1. Where Officer has a reason to believe that Credit has been Fraudulently availed or is ineligible to avail Credit
2. Credit has been availed on the basis of Ta Invoice or Debit Noted but, the tax charged has not been paid to the Government
3. The Recipient has availed the credit however is not found to be in existence or not doing any business from the place of his registration
4. The Registered person is not having any documents as prescribed in Rule 36 of CGST Rules.
• Albeit hypothetically it appears that Government needed to block credit in the situations where enrolled individual isn't found into reality, tax has not been paid to Government or credit has been profited without receipt of Goods or Services or both. Anyway the Crux in this specific case is the manner by which would a legit citizens choose whether there seller is in presence or is paying assessment to the Government and so forth. In this way with a view to not give any difficulty to legit citizens, in the 39th Council meeting it was concluded that the "Know Your Supplier" will be presented, so essential data can be thought about the Vendor. It is appropriate to note here that the impact of board meeting for this specific case has not been advised at this point and subsequently it will be extremely hard to track down the status of various Vendors. Real Tax payers will in every case in this way challenge the restriction of credit in the official courtroom and further there working capital will go for 'hurl' because of blockage of Input Tax Credit.
• Description of Rule 86A of the CGST Rules:-

The Rule specifically states that, credit can only be restricted if the Commissioner or Officer Authorized in his behalf as a “reason to believe” that credit has been availed fraudulently or is ineligible

Reason to believe has been discussed in various case laws where reasons are recorded in written documents. It is pertinent to note here that it becomes imperative, that the reasons should be given to Assesse for his blocked portion of credit.

Rule 86A of CGST Rules further does not provide procedure to be followed in the case disallowance of credit. Therefore without providing intimation or opportunity or being heard will be a violation of principles of natural justice and it creates unjust enrichment to genuine tax payers or Assesse.

• Whether Rule 86A is constitutionally valid or not?

To discuss the above question we need to go into legality of the “Central Goods and Service Tax Act”. It is pertinent to note here that in the CGST Act there is no Section which particularly enact Rule 86A. To go one step further Rule 86A over rides or by pass Section 73 of the CGST Act. Section 73 specifically states that “where it appears to Proper Officer that any tax has not been paid, short paid, erroneously refunded or credit has been wrongly availed other than the reason of Fraud, wilful misstatement or suppression of facts to evade a tax a notice is to be served to the Assesse as to why the amount payable should not be levied under the Provision of The Act. Therefore to conclude Rule 86A denies the very basic Principle of Section 73 of the Act under which notice is issued and therefore in effect there will always be a question of constitutional validity of Rule 86A. Needless to say in terms of Principle of Legality “Rules cannot override the Act”

Conclusion :- In our view definitely the Provision can be challenged in the Court of Law, meanwhile Government should come with a clarification on restriction of Blocked Credit under Rule 86A and should lay down the proper procedure to be followed before invoking Rule 86A , therefore it does not create hardship to genuine taxpayers.