DECEMBER 29, 2020

By K Srinivasan (IRS)

# Salvo No.1 - Rule 86A

THE Government lately unearthed multiple fraudulent cases of ITC availed on fake invoices i.e. issuance of invoice without supply, over supply and other fraudulent activities, which has made a dent on the revenue collections of the exchequer.

In order to prevent such misuse, with effect from 26.12.2019, Rule 86A was inserted in the CGST Rules, 2017. Rule 86A of CGST Rules provides wide powers to the Commissioner or an officer authorized by him, not below the rank of Additional Commissioner [86A(1) refers].

To impose restrictions on ITC available in the credit ledger in a case where he has reason to believe that the ITC has been fraudulently availed or is ineligible.

Such officer can unblock the same if conditions for disallowance no longer exist or if one year has lapsed from the date of imposition of such restriction. [86A(3) refers]

The background of the insertion of Rule 86A

A writ petition was filed in 2019 in Alfa Enterprise v. State of Gujarat, against the blocking of credit ledger in the High Court of Gujarat.

The Hon'ble High Court held - 2019-TIOL-2335-HC-AHM-GST that the blocking of the credit is not backed by any statutory provision under the CGST Act or Rules prescribed and directed the revenue to unblock the credit ledger.

Soon after this decision, the CGST Rules were amended and Rule 86A was inserted to empower a Proper Officer to block a credit ledger on the basis of the grounds provided therein.

Cases in which a credit ledger can be blocked by an officer

A Commissioner or Officer Authorized in his behalf, not below the rank of Additional Commissioner can restrict the use of Input Tax Credit from the credit ledger of an assessee in the following circumstances: [86A(1) refers]

1. Where Officer has a reason to believe that Credit has been fraudulently availed or is ineligible to avail Credit

2. Where credit has been availed on the basis of Tax Invoices or Debit Notes or other documents prescribed in Rule 36 of the CGST Rules by a registered supplier who has been found to be non-existent or not to be conducting business from his place of registration.

3. Where credit has been availed on the basis of documents prescribed under Rule 36 without the receipt of goods or services or both.

4. Where credit has been availed on the basis of documents prescribed against which no tax has been paid to the government.

5. Where credit has been availed on the basis of documents prescribed by Rule 36 of the CGST Rules by a recipient who is found to be non-existent or not to be conducting business from his place of registration.

6. Where 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.

Remedies available to a taxpayer

It is surprising that the CGST Act and Rules do not provide a remedy to taxpayers for the unblocking of their credit ledger, which looks like being left to the discretion of the department.

Thus, a question arises as to the remedies available to taxpayers in such cases where department is not unblocking the credit ledger.

Grounds for challenge

Rule 86A is ultra vires the CGST Act

Conditions under Section 16 of CGST Act restrict the availment of credit, and warrant reversal in cases where credit has been wrongly availed.

'The right to avail and utilize ITC for discharging tax liability is a legal right arising from the statute and it is trite in law that this right can be curtailed only with the specific power of the law and not otherwise'. [Eicher Motors Ltd. v. Union of India - 2002-TIOL-149-SC-CX-LB

None of the provisions contained in Section 16 including the Proviso 2 to the said Section or any other sections under the CGST Act empower the government to block ITC unilaterally, under any circumstances.

The Act provides for the provisional taking of credit on a self-assessment basis, and the blocking of credit goes against the scheme of the Act.

Thus, Rule 86A does not draw strength from any provisions of the CGST Act. The powers prescribed vide Rule 86A does not flow from the CGST Act, and hence can be challenged on the ground that it is ultra vires the Parent Act.

The decision of the Court in a similar case namely Kalpsutra Gujarat v. Union of India - 2020-TIOL-1558-HC-AHM-GST is awaited.

A similar issue was also before the Gujarat High Court in the cases of Valerius Industries v. Union of India - 2019-TIOL-2094-HC-AHM-GST whether the ITC can be blocked by the Revenue authorities.

The Court held that blocking of ITC without issuing a show cause notice and opportunity of hearing, was patently illegal and arbitrary and therefore asked the Department to accordingly unblock the ITC so blocked.

However, above cases were decided prior to the introduction of Rule 86A in the CGST rules.

Under Rule 86A of the CGST Rules, the empowered officer is not required to give the assessee an opportunity of being heard before blocking of their credit ledger.

Therefore, the operation of Rule 86A in itself is tantamount to violation of principles of natural justice, insofar as it does not mandate that an opportunity be given to the assessee to be heard before the credit ledger is blocked.

And therefore, any action taken by the revenue arbitrarily under the said Rule is in violation of Principle of Natural Justice.

Recipient should not suffer on account of a supplier's default

Rule 86A subjects bonafide tax payers to undue hardship by blocking their legitimate credit, due to the default of the supplier.

Section 43A was inserted into the CGST Act vide the CGST (Amendment) Act, 2018 [CGST (Amendment) Act, 2018, 29th August, 2018]

Section 43A(6) provides that the supplier and the recipient of a supply shall be jointly and severally liable to pay tax or to pay the input tax credit availed, as the case may be, in relation to outward supplies.

The said section has not been notified yet. Therefore, same shall not apply. Further as contemplated under Section 42 & 43 of CGST Act read with Rule 69 and 71 of CGST Rules, there is a specific mechanism for reversing the credit in case of the discrepancy in the ITC availed by the recipient against the output tax liability of the supplier of goods/services. However, such proposals have been put on hold for now.

The facility to furnish GSTR- 2 and GSTR-3 not being available, the buyer can't be faulted for the seller's default to pay taxes or file returns at his end.

Accordingly, there is no system-based matching of ITC being carried out presently and till the time such provisions are in place, the recipients can be restricted to claim ITC provisionally.

It has been held in a slew of cases that a bonafide buyer cannot be made to suffer on account of a seller's default.

In Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi, the Delhi High Court read down the relevant provision, to save it from turning violative of Article 14 of the Constitution for being inherently arbitrary.

The only case when such provision applies is when there is material on record to demonstrate that the purchasing dealer and the selling dealer acted in collusion and in detriment to the exchequer.

However, in the event of the selling dealer failing to deposit the tax collected, the remedy for the authorities is to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer his input.

The Supreme Court affirmed the said case and dismissed the Revenue's petition seeking special leave to appeal against this decision.

In Sri Vinayaga Agencies the Madras High Court held that 'law could not empower tax authorities to reverse the ITC availed on a plea that the selling dealer has not deposited the tax. It can revoke input credit only if it relates to the incorrect, incomplete or improper claim of such credit by a dealer'.

A short conclusion

A similar view has been taken by various other high courts throughout India. An analysis of Rule 86A of the CGST Rules reveal the same subjects a genuine tax payer to undue hardship by blocking their credit ledger for no fault of theirs but that of their suppliers.

The intention of the government may be legitimate i.e. to curb fraudulent availing of credit but may not be legal as Section 86A attempts to bark up the wrong tree and fall prey to long litigations.

# Salvo No.2-Rule 86B

As per recent CBIC Notification No. 94/2020-Central Tax dated December 22, 2020, Rule 86B has been introduced which has imposed 99% restriction on ITC available in electronic credit ledger of Registered Person if value of supply (other than exempt supply and zero-rated supply), in a month exceeds Rs.50 lakhs. This means 1% of Output liability to be paid in cash.

Since the taxpayer will have balance in ECL after meeting output tax liability, taxpayer still needs to pay the tax through cash and this will lead to direct impact on the working capital requirements

This limitation is applicable where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees.

The new Rule Reads as follows:

86B replayed

Restrictions on use of amount available in electronic credit ledger. - Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where -

(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be,

have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or

(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i) of first proviso of sub- section (3) of section 54; or

(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (ii) of first proviso of sub- section (3) of section 54; or

(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or

(e) the registered person is -

(i) Government Department; or

(ii) a Public Sector Undertaking; or

(iii) a local authority;

(iv) a statutory body:

Provided further that the Commissioner or an officer authorized by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.

A quick illustration.

If the taxpayer has paid through Electronic Cash ledger Rs.90,000/- each month against a liability of 9,00,000/- each month on a Turnover of 50,00,000/ per month, let us say for an example, till November 2020 then this rule 86B will not apply for the month of December 2020 since he has met the 1% tax payment through the Electronic cash Ledger and 50,00,000/- monthly Turnover as well.

A practical conclusion

The important point to note here is electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year, is allowed to be off-set from Electronic Credit Ledger, which is said to be its saving grace.

The CBIC flyer - does it help understand the realities over the misconceptions of the scheme really?

People ask the following Questions about the scheme which the flyer is said to elude.

1. Either pay more than 1 lakh of Income Tax or get GST refund of more than 1 lakh, not to come under the scheme. What about Income Tax refunds of more than 1 lakh?

2. Basically from payment angle of IT and refund of GST only? What about excess accumulated ITC leading to IT losses and in turn leading to IT refunds?

3. Does it imply that, companies incurring business losses will also be expected to meet the 1% cash liability, entailed by the scheme, despite their bad financial state?

4. Why the rule refers to tax payment by company or the director! What does that imply?

From all the above, one thing is clear that even having input balance, the taxpayer will still be liable to make cash payment of at least 1%.

This will result in cascading effect as it becomes cost to the industry/trade and create additional working capital requirements and additional cost of borrowing and interest and create a double cascading effect, which will add to the already experienced Niagara-effect of the Indian GST.

THE WAY FORWARD

Business, as on date, is tottering under Covid 19 and economic downturn and it is already proving impossible to overcome its adverse impacts on the Indian business.

In such trying times, introducing a slew of Rules like 86A & B and laws by the Government for curtailing ITC/refunds will only beat the wind out of the sails of trade and industry leaving them bereft of any hopes of survival.

Government, at the time of implementation of GST assured that there will be a seamless flow of ITC even as multiple taxes have been subsumed and there will be no cascading effect which will result in a single market and a single tax and a synergized India.

But, reality projects our GST in very poor light before the OECD. It is quite contrary to the policy statement of the Government given on the floor of the Parliament, which is fully binding on it, yet to be fully lived up to.

It is high time the Government did something to deliver the falling Indian trade and industry from the pangs of the Pandemic and the ravines caused by the economic slump.

Let the New Year begin on a cheerful note, please.

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Associate, Indirect & Corporate Taxes, at RANK Associates. The views of the Author are purely personal.)