Protecting Your ITC: Understanding Rule 86A of CGST Rules

CA Harshit Goyal , Last updated: 18 May 2023  
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Rule 86A of CGST Rules, 2017: How to protect your input tax credit from being blocked

Introduction

Rule 86A of the CGST Rules, 2017, plays a crucial role in protecting the input tax credit (ITC) of taxpayers. It empowers the Commissioner or an authorized officer to block the ITC if it has been fraudulently availed or is ineligible. In this article, we will delve into the circumstances under which ITC can be blocked, the safeguards and legal judgments favoring taxpayers, and the importance of equipping oneself with knowledge about Rule 86A.

Circumstances for Blocking ITC: Under Rule 86A, the following circumstances may lead to the blocking of ITC

  1. Supplier non-existent or not conducting business at the registered place.
  2. Goods or services not received.
  3. Tax not paid to the Government for the relevant supply.
  4. ITC availed without proper documents, such as tax invoices or debit notes.
  5. Recipient non-existent or not conducting business at the registered place.
Protecting Your ITC: Understanding Rule 86A of CGST Rules

The Role of the Commissioner and Authorized Officers

The Commissioner or an authorized officer, not below the rank of Assistant Commissioner, has the authority to block the ITC. However, if the Commissioner is satisfied that the conditions for blocking no longer exist, they can allow the debit of the blocked amount.

Safeguards and Legal Judgments

Several safeguards and legal judgments protect taxpayers' interests when it comes to blocking ITC under Rule 86A. These include:

1. Reason to believe

The Commissioner must have a valid "reason to believe" that the credit is ineligible or fraudulently availed. This reason must be based on one or more grounds mentioned in Rule 86A and must be recorded in writing.

 

2. Recording reasons

The power to block ITC cannot be invoked without recording the reasons in writing and communicating them to the taxpayer. The Madras High Court, in the case of M/S HEC India LLP, has upheld this requirement.

3. Proper application of mind

The officer must form an opinion after considering all the facts of the case, the nature of the prima facie fraudulently availed or ineligible credit, whether it falls under the grounds mentioned in Rule 86A, the amount of ITC involved, and the necessity of the restriction to protect the interest of revenue.

4. Proper authority

While the Commissioner is the proper officer for exercising the power of Rule 86A, they can authorize any officer based on monetary limits. Deputy or Assistant Commissioners handle ITC up to 1 crore, Additional or Joint Commissioners handle ITC more than 1 crore but up to 5 crores, and Principal Commissioners or Commissioners handle ITC more than 5 crores.

Timely Investigation and Adjudication

Considering the impact on the working capital of registered persons, it is essential that the investigation and adjudication regarding blocked ITC are completed at the earliest. This ensures a fair and efficient process for taxpayers.

The Duration of Restrictions

According to a judgment by the Karnataka High Court in the case of Aryan Tradelink, the restriction imposed by Rule 86A cannot be extended beyond one year. Extending the restriction beyond this period is impermissible in law.

 

Conclusion

Equipping oneself with knowledge about Rule 86A and adhering to the safeguards is crucial for protecting input tax credit and avoiding potential litigations. By understanding the circumstances under which ITC can be blocked, following legal judgments, and staying compliant, taxpayers can safeguard their interests and strengthen their position in the ever-changing landscape of GST.

We hope that this article has been helpful in summarizing these important sections and encourage you to stay updated with the latest news and legal provisions in the GST in India by following our updates in the future.


Published by

CA Harshit Goyal
(CA)
Category GST   Report

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