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September 17, 2020

HC accepts Petition on ITC blockage due to non-filing of GSTR 3B

by CA Shivam Jaiswal in GST, Legal Court Judgement

HC accepts Petition on ITC blockage due to non-filing of GSTR 3B

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

Certain situations when ITC cannot be claimed:-

  • A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
  • A person cannot claim ITC for the tax paid for the following:-
    • Food and beverages
    • Outdoor catering
    • Beauty treatment
    • Health services
    • Cosmetic and plastic surgery
  • Services of general insurance, servicing, repair and maintenance
  • Sale of membership in a club, health, fitness centre
  • Rent-a-cab services, life insurance, health insurance
  • Travel, benefits extended to employees on vacation such as leave or home travel concession.
  • Works contract services for construction of immovable property
  • Construction of immovable property on own account
  • Composition scheme
  • Non residents
  • Supply for personal use
  • Free samples and goods destroyed
  • Restaurant services

One of the objectives of the GST regime has been the seamless flow of credit from one stage to another in the chain of value addition and to avoid the cascading effect of tax. Rule 86A of the CGST Rules provides powers to the Commissioner or an officer authorized by him to impose restrictions on ITC available in the electronic credit ledger (ECL), in a case where there are reasons to believe that the ITC has been fraudulently availed or is ineligible.

The Commissioner has the authority to utilize the power under Rule 86A in the following cases:-

  • non-existent supplier/recipient or not conducting business from its registered place
  • the tax has not been deposited with Government
  • issuance of invoice without supply
  • recipient not in possession of invoice/debit note

The said Rule also specifies that on account of the said restriction, the ITC would not be allowed to be used to discharge the output GST liability or claim refund of any unutilized amount for a period of 1 year.

Let us refer to the case of M/s Kalpsutra Gujarat Vs The Union of India (Gujarat High Court) whereby the writ application, the writ applicant, a partnership firm through one of its partners had prayed for:-

  • Issue of an appropriate writ, direction or order, striking down Rule 86A of Central Goods and Services Tax Rules, 2017, in so far as it gives power to block the ITC at no fault of the registered recipient and declare it ultra vires of Section 16 of the CGST Act, 2017.
  • Issue an appropriate writ, direction or order, to the respondents to allow petitioner to utilize the ITC until it is proved that the supplier did not pay the tax after following up the provisions of CGST Rules, 2017
  • The court was also requested to direct or order to allow the Petitioner to utilize Input Tax Credit of Rs 3,50,868 and grant stay against the recovery of Input Tax Credit of Rs 7,01,735.
  • Any other further relief as may be deemed fit in the facts and circumstances of the case please be granted

Proceedings of the High Court

  • Having heard the applicant and having gone through the material on record, the High Court was inclined to issue notice to the respondents with respect to the reliefs prayed in the draft amendment and the main petition.
  • The applicant was directed to furnish one set of his entire paper book including the draft amendment to the Additional Solicitor General of India.
  • The division bench issued notice to the respondents with respect to the reliefs prayed.
  • HC wanted to understand from the respondents whether the omission on the part of the third party (Seller) in filing the GSTR-3B for the relevant period would be sufficient to block the Input Tax Credit of the writ applicant.
  • They also wanted to understand whether for such action, the Department had invoked Rule 86A of the Central Goods and Services Tax Rules, 2017.

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