In the petition filed for challenging Rule 86A over blocking of Input Tax Credit, the division bench of Hon’ble Gujarat High Court headed by Chief Justice Vikram Nath and Justice J.B. Pardiwala has issued the notices to the Central and State to submit their response by 21.01.2021.
In the matter of M/s Surat Mercantile Association v. Union of India, R/SCA No. 15381 of 2020, the petitioner filed the petition challenging the constitutional validity and vires of Rule 86A of the Central GST Rules and the Gujarat GST Rules. It is significant to note here that Rule 86A of the CGST Rules has given unrestrained power to the GST Authorities to block input tax credit in electronic credit ledger maintained on GSTN portal without giving any notice or intimation to the taxpayer, if the concerned GST officer has reason to believe that input tax available in the electronic credit has been fraudulently availed or is ineligible. Electronic credit ledger of a buyer of goods or services of an honest business entity is getting blocked even if it is not at fault.
To quote Rule 86A of the CGST Rules:
“86A. Conditions of use of amount available in electronic credit ledger.-
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-
- a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-
- 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; or
- without receipt of goods or services or both; or
- b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
- c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
- d) 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,
may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
From the bare reading of the Rule 86A of the CGST Rules, it is clear that this Rule allows unilateral blocking of the electronic credit ledger without (i) issuance of Show Cause Notice and (ii) without giving an opportunity of fair hearing; which is in violation of principles of natural justice. These are the two fundamental principles which are to be followed in the tax laws and without these principles being incorporated in the Rules, the adjudicating authority has arbitrary power to use and misuse his powers.
It will not be wrong to say that Rule 86A of the CGST Rules is a draconian, arbitrary, irrational and unduly harsh provision and therefore violative of article 14 of the Constitution of India. It is ultra-vires the Section 74 of the CGST Act in as much as Section 74 of the CGST Act mandates issuance of show cause notice for demand of ineligible or fraudulently availed input tax credit.
Further it will not be incorrect to say that Rule 86A of the Rules also ultra-vires Section 75(4) of the Act which mandates grant of an opportunity of hearing where any adverse decision is contemplated against a taxpayer.
Reading down of Rule 86A can be proved as blessings to the honest taxpayers whose ITC are being blocked without any intimation, or without granting any hearing opportunity. Once the hearing opportunity is provided to the taxpayers, then there is a scope that the taxpayers may satisfy the adjudicating authority to the extent that the ITC may not be blocked.
It will be important to see the outcome of the above-mentioned filed petition.
Read the order at : Order_Surat Mercantile Association
Yuvraj is an advocate and has completed his B.A. LL.B(Hons) from RGNUL-Punjab. He is a practicing advocate and has been involved in matters pertaining to GST and other indirect taxes as well as Direct Tax. He is active in Writ Courts and has involvement in a few landmark judgments like Pitambra Books Pvt. Ltd. V. Union of India (W.P.C. No. 627 of 2020), and represented Sales Tax Bar Association (Delhi) to resolve GST issues and glitches.