The Finance Ministry has come out with detailed guidelines for disallowing debit of electronic credit ledger under GST rules.
Rule 86A of GST Rules 2017 prescribes that in case Input Tax Credit (ITC) is availed fraudulently, the assessee can be denied debit of amount equivalent to such credit from the electronic cash ledger. There is also a provision that such restriction will cease to have effect one year from date of imposition of restrictions.
However, the GST Policy Wing of the Finance Ministry acknowledged that tax officials have raised some doubts. Various court rulings have also emphasised the need for framing guidelines.
As on date, an officer — not below that rank of Assistant Commissioner — must have ‘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. Now, the guidelines provide five grounds and any one or more than can be applied for ‘reasons to believe’.
First, ITC is availed by a non-existent entity or one which is not conducting any business. Second, ITC has been availed without receiving goods or services or both. Third, ITC is availed but tax is not paid. Fourth, the registered person availing is found to be non-existent or not doing any business. And fifth, credit is availed without any invoice, debit note or other valid document.
The procedure will involve ascertain of the allegation bases on material evidence, application of mind by the officer to record reasons to believe and finally disallowing debit of amount. Post this, the officer may take a fresh look at the issue and, if he is satisfied that the ITC initially considered to be fraudulently availed or ineligible as per rule is no more ineligible or wrongly availed, then he may allow the use of the credit.
Considering the implication of such restrictions on tax collection and working capital requirements of businesses, it has been advised to complete investigation and adjudication within the period of restriction — one year.
According to Prateek Bansal, Associate Partner with White & Brief, writ petitions have also been filed challenging the constitutional validity of Rule 86A in as much as it gives the blanket powers to the Revenue Department. In light of this, few States (such as Kerala) had earlier issued the guidelines for blocking/unblocking of ITC. However, companies with multi-State operations were being subjected to different practices across different States.
Now, besides ensuring uniformity across the nation, the present CBIC Circular attempts to rule out the subjectivity in application of Rule 86A by the revenue officers, and directs cautious use of the powers.
Impact on purchaser
Interestingly, one of the grounds prescribed for ITC blockage is where credit is availed in respect of tax which has not been paid to the government.
“Given the legal position that ITC is an indefeasible right and cannot be denied to a bonafide purchaser due to default on part of the seller, one cannot rule out litigation in case of genuine assesses. Therefore, it is critical that the CBIC guidelines be followed by the GST authorities in its ‘letter and spirit’, and in line with the principles of natural justice and settled judicial positions,” Bansal said.