Haryana has become the first State to announce denying input tax credit (ITC) to any GST (Goods and Services Tax) assessee found to be bogus or fake. More and more States are expected to issue similar circular in the days to come.

The State Government has issued detailed guidelines explaining the circumstances during which credit can be blocked. “The functionality of blocking and unblocking ITC is an important tool for safeguarding the Government revenue, particularly in cases of fraudulent activities by the taxpayer,” said the October 30 circular issued by the Excise & Taxation Commissioner of Haryana Government. Government officials feel that such a move will prove to be deterrent for shell companies, formed by a business entity to take undue advantage.

One of the circumstances for the said action says that full amount of credit available in the Electronic Credit Ledger of the taxpayer should be blocked instantly in cases where the “registered taxpayers are found to be bogus/fake by any investigation or intelligence. Such taxpayers are not entitled for the credit on the grounds that no supply has been made and proper tax has also not been deposited in respect of the claimed credit,” it said.

It made it clear that if the firms have been found non-functional, then full amount of credit should also be blocked. This is a case of supply not received. Credit should also be blocked in respect of those registered taxpayers who have claimed transitional credit through TRAN-1 /TRAN-II ( credit accrued during pre-GST regime but not realised on June 30, 2017) in excess of their lawful entitlement. However, “The credit should be blocked only to the extent of excess credit claimed by the taxpayers over and above their entitlement as per GST law.”

It further said that the registered taxpayers are not entitled for credit availed of by them accruing from receipt of supplies which have not been used in the course of business or furthering business. Here too, credit will be blocked only to the extent of amount of inadmissible credit. Similarly taxpayers will not be entitled for credit, if it is not admissible under the law or the taxpayers are not entitled for the credit in accordance with various provisions of the law. These provisions include if the tax on supplies has not been paid by the supplier, the recipient is not in possession of the tax invoice, the supply is outdated, or the supplier is composition taxpayer etc.

Experts are slightly sceptical about such a circular. According to Harpreet Singh, Partner in KPMG, where powers given in the circular are exercised on dealers, the same is likely to exasperate them as the circular gives unfettering powers to officers to deny/block ITC without giving any opportunity of being heard. “Though the circular is binding on jurisdictional officers of Haryana, this may act as a precedent for other State GST authorities. Thus, issuance of similar guidelines by other States may result in blockage of ITC at various locations, leading to unwarranted blockage of funds and resultant litigation for dealers with pan-India operations,” he added.