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The government introduced Rule 86A to block the use of fraudulently availed ITC and thereby protect the interests of the revenue.
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.
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 Commissioner may allow the use of credit if he finds that the conditions for disallowing the credit no longer exist.
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:
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.
This restriction will cease only after the expiry of one year from the date of imposing such restrictions.