Whether non-payment to supplier can leading to blocking of ITC

The Gujarat High Court ruled that blocking Input Tax Credit (ITC) under Rule 86A of the CGST Rules is a serious measure that should only be used when ITC is fraudulently availed or ineligible. The court found that simply not paying a supplier within 180 days, without allegations of fraud, is not sufficient grounds to block ITC. The court directed the revenue to unblock the ITC, stating that such actions must have legal authority and cannot extend beyond one year.

Question

Whether non-payment to supplier can leading to blocking of ITC?

FACTS OF THE CASE

1. The Petitioner is in the business and supply of mobile and mobile parts.

2. Rule 86A of the CGST Rules entitles the Commissioner or any officer authorized by him in this behalf, not below the rank of Assistant Commissioner, to not permit debit (utilization) of the ITC lying to the credit in the Electronic Credit Ledger (“ECL”) of a taxpayer in certain circumstances.

3. In the said case, the ITC lying in ECR was blocked on allegation that the Petitioner had not paid the consideration for supplies received from D.G. Impex (i.e. supplier) within the period of 180 days and therefore not fulfilled the conditions of section 16(2)(d).

4. The Petitioner challenged the blocking on the grounds that the only reason for blocking the ITC is that he is ineligible to avail the same in view of Section 16(2). Moreover, his ITC was blocked for more than 18 months against the provisions of Rule 86A.

THE HIGH COURT HELD THAT

1. A plain reading of Rule 86A of the CGST Rules indicates that the restriction, as contemplated therein can be imposed only where the ITC available in the ECR has been “fraudulently availed” or is “ineligible.

2. There is no allegation that the Petitioner has “fraudulently availed” the ITC.

3. Such a drastic measure and must be exercised limited.

4. The provisions of Rule 86A ought to be strictly construed.

5. The Revenue was directed to unblock the ITC as the action was carried without the authority of law. In any case, such action cannot extend beyond one year.

BLOCKING OF CREDIT – RULE 86A OF CGST RULES

Rule 86A of CGST Rules, 2017 empowers the Commissioner or its authorized officers to disallow debit of electronic credit ledger and block the credit based on a reasonable belief that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible.

It is clear that there must be “reasons to believe” that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person before disallowing the debit of amount from the electronic credit ledger of the said registered person.

GUJARAT HIGH COURT’S TAKE ON RULE 86A

In the case of S.S. Industries v. UOI [2020] 122 taxmann.com 296 (Guj.), the honourable Gujarat High Court has held that the Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to the passing of any specific order assigning prima facie reasons for invoking Rule 86A. To this extent, the Government needs to look into the matter, issue appropriate guidelines and lay down some procedures to be followed to exercise power under Rule 86A of the Rules. The High Court also observed that Rule 86A of the CGST Rules should not be used as a tool to harass the taxpayers.

CBIC GUIDELINES

Now, CBIC has issued detailed guidelines for the officers to exercise the powers of Rule 86A. In these guidelines, the CBIC has clarified grounds for disallowing debit of an amount from electronic credit ledger, proper authority for the purpose of Rule 86A, the procedure for disallowing debit of electronic credit ledger or blocking credit under Rule 86A etc.

GROUNDS FOR INVOKING RULE 86A FOR BLOCKING OF CREDIT

The reasons for such belief must be based only on one or more of the following grounds:

1. The registered person avails the credit on the invoices or debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.
2. The registered person avails the credit on invoices or debit notes without actually receiving any goods or services or both.
3. The registered person avails the credit on invoices or debit notes, the tax in respect of which has not been paid to the government.
4. The registered person claiming the credit is found to be non-existent or is found not to be conducting any business from the place declared in registration.
5. The registered person avails the credit without having any invoice or debit note or other valid documents.

The Commissioner, or an officer authorized by him, not below the rank of Assistant Commissioner, must have reasons to believe that ITC availed is ineligible or availed fraudulently and have material evidence for disallowing debit of an amount from ECL, only after proper consideration of all the grounds mentioned above.

PROPER AUTHORITY FOR THE PURPOSE OF RULE 86A

The Commissioner/Principal Commissioner may authorize the exercise of powers for disallowing the debit amount from ECL under Rule 86A based on the following monetary limits as mentioned below:

Total amount of ineligible or fraudulently availed input tax credit Officer to disallow debit of amount from electronic credit ledger under Rule 86A

Not exceeding Rupees 1 crore Deputy Commissioner/Assistant Commissioner

Above Rupees 1 crore but not exceeding Rs. 5 crore Additional Commissioner/Joint Commissioner

Above Rs. 5 crore Principal Commissioner/Commissioner

If during the course of Audit under section 65 or 66 of CGST Act, 2017, it is noticed that any input tax credit has been fraudulently availed or is ineligible as per the grounds mentioned in Rule 86A, which may require disallowing debit of electronic credit ledger under Rule 86A, the concerned Commissioner/ Principal Commissioner of CGST Audit Commissione rate may refer the same to the jurisdictional CGST Commissioner to examine the matter for the exercise of power under Rule 86A.
Procedure for disallowing debit of electronic credit ledger/blocking credit under Rule 86(A)

The Commissioner or the officer authorized must have reason to believe that the input tax credit availed by the registered person has either been fraudulently availed or is ineligible, as per conditions/grounds based on material evidence available and found it necessary to protect the interests of revenue by disallowing debit of electronic credit ledger of the said person. Such “Reasons to believe” shall be duly recorded by the concerned officer in writing on file before he proceeds to disallow debit of amount from electronic credit ledger of the said person.

The amount disallowed for debit from electronic credit ledger should not be more than the amount of input tax credit which is believed to have been fraudulently availed or is ineligible, as per the conditions/grounds mentioned above. The action by the Commissioner or the authorized officer to disallow debit from the electronic credit ledger of a registered person is informed on the portal to the concerned registered person, along with the details of the officer who has disallowed such debit.

ALLOWING DEBIT OF DISALLOWED/RESTRICTED CREDIT UNDER RULE 86A

The Commissioner or the authorized officer may, on his own or based on submission of the assessee may examine the matter afresh. After being satisfied that the ITC availed initially considered being fraudulently or ineligible, it is no more ineligible or wrongly availed. He may allow the use of the ITC, so disallowed/restricted, to the extent of eligibility. However, the reasons for allowing the debit of ECL, earlier disallowed, shall be duly recorded on file in writing before allowing debit of electronic credit ledger.
Moreover, the restriction is only for one year and shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.