Can GST Officer Block the ITC available in the Electronic Credit Ledger?
Input credit basically means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. ITC scheme is the backbone of the GST regime.
It is one of the main purposes of brining GST as it would remove cascading effect by facilitating seamless flow of credit of tax paid on receipt of goods and services or both which are used or intended to be used in the course or furtherance of business at each stage of supply.
The electronic credit ledger reflects the amount of Input Tax Credit available to the taxpayer. Thus, every claim of input tax credit (ITC) of the registered taxpayer eligible for claiming such a credit is credited to this ledger.
The amount available in the electronic credit ledger is utilized in making payments towards outward tax liability by the registered taxpayer. The electronic credit ledger shall be maintained in form GST PMT – 02. This form shall be maintained on the common portal for every registered person eligible to claim input tax credit under GST.
Can the ITC kept in the Electronic Credit Ledger be blocked under GST?
Rule 86A, inserted vide notification no. 75/2019 – Central Tax dated 26.12.2019 empowers the authority to block the ITC available under electronic credit ledger.
According to Rule 86A, if the Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner has reason to believe that ITC available in electronic credit ledger has been fraudulently availed or is ineligible, then they may block the credit available in electronic credit ledger to the extent of equivalent amount.
The following may constitute as “reasons to believe”:
1.ITC has been availed on the strength of tax invoices, debit notes or any other document prescribed under rule 36-
i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained;
ii. without receipt of goods or services or both
2. ITC has been availed on the strength of tax invoices, debit notes or any other document prescribed under rule 36 in respect of any supply, but the tax charged in respect of the same has not been paid to the Government
3. the registered person availing ITC has been found non-existent or not to be conducting any business from any place for which registration has been obtained
4. the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36
What led to the insertion of Rule 86(A)?
Large number of GST fraud cases involving the use of fake invoices for wrong availment of ITC, which was further used to pay GST on outward supply were detected since the rollout of GST by the Central GST authorities as well as State GST authorities. Prior to the insertion of Rule 86(A), ITC could not be provisionally blocked as it was held in the matter of M/s Alfa Enterprise.
M/s Alfa Enterprise was served with an order under section 83 of the CGST Act, 2017 attaching bank account, sealing of godown/office and blocking of credit available in electronic credit ledger.
High Court held that the order of attachment of bank accounts is without authority of law and the order of blocking of credit is not backed by any statutory provision. The Court withdrew the attachment of the bank account of the petitioner and to unblock the credit available in the electronic credit ledger.
Soon after the decision of the HC, the CGST Rules were amended with the insertion of Section 86(A).
When can such blocked ITC be unblocked?
The Commissioner, or the officer authorised by him may, upon being satisfied that conditions for disallowing debit of electronic credit ledger, no longer exist, allow such ITC (i.e the blocked ITC shall be unblocked). Such restriction shall cease to have effect after the expiry of 1 year from the date of imposing such restriction.
Issues arising due to Rule 86A:
Though the Rule 86A was introduced by the Department to safeguard the interest of the revenue, there is every possibility that this Rule can be used against bona fide tax payers, who may have availed the ITC on the basis of genuine invoices and yet their ITC is blocked for various reasons, for e.g. ITC does not reflect in GSTR-2A.
It is generally mentioned in law that whenever any right of a taxpayer is curtailed or a demand is to be raised against such taxpayer, an opportunity of being heard must be afforded to the taxpayer before raising the demand or taking away the right.
Also, Rule 86A does not require the Commissioner to provide the assessee an ‘opportunity to be heard’ before blocking such ITC (which is a right of the assessee under the CGST Act) and only requires that such reasons be recorded in writing by the Commissioner.
Rule 86(A) though specifically requires the officer to record the reasons in writing for blocking the credit; however, it does not mandate the officer to intimate the said reasons of blocking of ITC to the assessee whose ITC has been blocked by such officer. Also, the said rule does not prescribe for a prior issue of notice/ intimation to the assessee regarding the blocking of ITC.
Though the intention behind the introduction of the Rule may be to curb the practice of Bogus Purchases and to safeguard the revenue, there is also a chance that an honest taxpayer may be put to disadvantage due to this provision.