All you need to know about CGST Rule 86A on ITC

The government introduced Rule 86A to block the use of fraudulently availed ITC and thereby protect the interests of the revenue.

What is Rule 86A under GST?

Rule 86A was introduced by the government vide Notification no. 75/2019 dated 26.12.2019 to block fraudulently availed ITC. The main purpose behind the introduction of this Rule was to block the use of fraudulently availed ITC. As per this Rule, a Commissioner or any officer authorised by him can block the ITC available in the electronic credit ledger of the taxpayer if he has ‘reasons to believe’ that he has fraudulently availed ITC.

The Commission shall record the reason in writing for blocking ITC.

What are the conditions under which ITC in the electronic credit ledger can be blocked?

The commission or any officer authorised by him, not below the rank of an Assistant Commissioner, can block a taxpayer’s ITC provided he has reasons to believe that the ITC is claimed fraudulently or the ITC is ineligible as follows-

• The tax invoices basis that ITC is being claimed has been issued by a registered person who is found to be non-existent or is not conducting business from the place for which the registration has been obtained. The ITC is available on an invoice for which supply has not been received.
• ITC is availed on an invoice on which tax has not been paid to the government.
• ITC is availed by a registered person who is found to be non-existent or is not conducting business from the place for which the registration has been obtained.
• The registered person does not have the invoice or debit note basis which he is claiming ITC.

The Commissioner may allow the use of credit if he finds that the conditions for disallowing the credit no longer exist.\

Is blocking of ITC by the GST officer legal?

As per section 16(1) of the CGST Act, all registered taxpayers who have paid tax on their inward supplies used to further their business can claim ITC on such taxes paid. Certain conditions for availing of ITC and restrictions on claiming ITC are mentioned under sub-section (2), (3) and (4) of Section 16 and Section 17 of the CGST Act. A taxpayer shall claim ITC after considering such conditions and restrictions. 

Claiming ITC for discharge of the output tax liability is a legal right of the taxpayer, and it can be blocked only through specific powers of the Law. Thus, a taxpayer has a legal right to avail ITC and use the same for discharging his output tax liability. 

None of the provisions under Section 16 or Section 17 of the CGST Act empowers the government to block ITC. Also, no other provision under the CGST Act allows the government to restrict ITC. However, Section 164 of the CGST Act empowers the government to make rules for carrying out the provisions of the CGST Act. By using this right, the government has introduced Rule 86A, which empowers the Commissioner to block ITC. 

Scope of Rule 86A: Rule 86A was introduced to provide the Department with a legal right to block ITC by the Tax Officer if the said ITC has been availed fraudulently. The invocation of Rule 86A requires the existence of reasons to believe that the ITC has been wrongly availed, along with supporting documents. In the absence of proper reasons to believe, the invocation of Rule 86A would be malafide.

Let us understand the introduction of this Rule with the help of a Gujarat High Court Ruling.

Case in brief: The assessee had challenged the right of the Revenue to block ITC by invoking Rule 86A of the CGST Rules pending inquiry or investigation. However, the Revenue revealed that the petitioner was claiming ITC on invoices received from the supplier against whom inquiry was going on for the issue of invoices without a supply of goods.

The Revenue asked the assessee to deposit a certain amount in cash and also blocked his credit ledger. Later, he was also denied a refund of the amount deposited and his credit ledger was also not unblocked. So, he filed a writ before the Gujarat High Court challenging the right of the Revenue to block ITC on the below grounds:

1. He had made the payment of GST on inputs through real-time gross settlement and he had also manufactured the final products and made payment of GST on the same by using the inputs procured.
2. The Revenue had no evidence that the inputs were not received.
3. GSTR-3B was timely filed by the assessee and no dispute related to claiming ITC was raised by the Revenue at that time.

Gujarat High Court Decision: The Court held that Rule 86A of CGST Rules can be invoked during the pendency of investigation or inquiry. The availing of ITC and its utilisation are two different stages, and thus no vested right of the taxpayer arises before taking credit.

Also, Rule 86A requires the existence of a ‘reason to believe’ that ITC has been fraudulently availed, and should be evidenced by the application of mind along with supporting documents. In the absence of the same, the exercise of power would amount to malice in law. In this case, the investigation and blocking of ITC was not malafide or without any supporting evidence.

When does the blocking of ITC under GST cease?

This restriction will cease only after the expiry of one year from the date of imposing such restrictions.