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Rule 86A - Automatic Unblocking is the need of the hour

NOVEMBER 24, 2021

By Nithyananda Shetty and Preetika Shetty

IN his treatise Arthashastra, Chanakya (Kautilya) says "Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive". This reminds us of the 'Input Tax Credit' mechanism, which is akin, as the Government by allowing input tax credit ensures that only right amount of taxes are collected, thereby allowing the economy to survive, sustain and grow. But a sad situation is that certain section of taxpayers misuse this mechanism for undue advantage thereby bringing the entire taxpayer community to disrepute. In view of this, the legal provisions for regulating the availment and utilization of Input Tax Credit (ITC) has always been at the heart of GST. Rule 86A of Central Goods and Services Tax Rules, 2017 is one such provision which was introduced vide Notification No. 75/2019-CT dated 26.12.2019.

Rule 86A is well known for its draconian nature as it empowers the GST authorities to block utilization of ITC in suspected cases of fraudulently availed ITC, non-existent supplier, evasion of tax by supplier, etc. Given its drastic nature, there is an inbuilt sunset clause under sub-rule (3) of Rule 86A which provides for cessation of such blockage on expiry of one year from the date of imposing such restriction.

Guidelines for invoking Rule 86A:

The Hon'ble Gujarat High Court in the case of M/s S S Industries Vs Union Of India - 2020-TIOL-2228-HC-AHM-GST had emphasized on the need for proper guidelines for invoking Rule 86A. The Court observed that ' Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to passing of any specific order assigning prima facie reasons for invoking Rule 86A. To this extent, the Government needs to look into the matter and issue appropriate guidelines and also lay down some procedure to be followed for the exercise of power under Rule 86A of the Rules '. Even other High Courts in some cases have reiterated the need for laying down guidelines for the purpose of invoking Rule 86A. Thus, to pay heed to the High Court orders, the Central Board of Indirect Taxes and Customs (CBIC) has issued guidelines on 02.11.2021 for disallowing debit of ITC in electronic credit ledger almost after two years of introduction of Rule 86A CBEC-20/16/05/2021-GST/1552dated 02.11.2021].

The guidelines laid down five specific grounds based on which the proper authority must form his belief for blocking the electronic credit ledger. It emphasizes that the Commissioner or an officer authorized by him, not below the rank of Assistant Commissioner, must form an opinion for blocking of ITC only after 'proper application of mind' considering all the facts of the case. Further, it also highlights that the reasons of belief are to be based on 'material evidence' and not just 'mere suspicion.' It is also reiterated that the power conferred in Rule 86A must be exercised after careful examination of all the facts of the case and not to be used in a mechanical manner. The remedy of disallowing debit of ITC from electronic credit ledger being extraordinary in nature, must be resorted to with utmost circumspection and with maximum care and caution. Monetary limits have also been prescribed and capping the blocked amount to ITC believed as fraudulently availed has been highlighted. However, the guidelines are not covering circumstances when such blockage is not lifted after one year or the safeguards available to taxpayers if such powers are exercised without due diligence.

Need for Automatic Unblocking of ITC:

Unfortunately, in several cases, the taxpayers are compelled to knock the doors of the High Courts to lift the restriction even after the lapse of one year owing to inaction of GST authorities. To name a few, the High Courts have allowed the writ petitions in the case of PSN Automotive Marketing Private Limited Vs The Assistant Commissioner of Central Taxes, Mangaluru, M/s Best Crop Science LLP Vs State Of U.P., M/s Aryan Tradelink Vs The Union of India - 2021-TIOL-1283-HC-KAR-GST and M/s Vimal Petrothin Private Limited Vs Commissioner, CGST and Others - 2021-TIOL-1412-HC-UKHAND-GST wherein the petitions were filed for removing the blockage which continued beyond one year. Now, this is something which is uncalled for, as the one-year validity for such a restriction is clearly prescribed in law. Nonetheless, the taxpayers had sought the intervention of High Courts to lift such restriction after one year.

In the recently reported case of Formative Tex Fab - 2021-TIOL-2185-HC-AHM-GST, the Hon'ble Gujarat High Court remarked that - '… the State cannot insist on continuing with something which is impermissible under the law '. The Hon'ble High Court also refrained from imposing any cost on the department since the petitioner did not insist for the same.

The precious time of the taxpayers and the High Courts can be saved if automatic unblocking mechanism on expiry of one year is embedded on the GST portal. Blocking of e-way bill, blocking of filing Form GSTR-1, auto-computation of late filing fees are some of the features which are already in-built on the GST portal to safeguard the interests of the revenue. What can be inferred from this? Does GSTN program IT systems imposing restrictions which are only pro-revenue? Only time will tell how effectively the safeguards provided "for" the taxpayers in the statute are implemented on the GST portal.


Our High Courts are already burdened, therefore, keeping in view the spirit of the Circular dated 2 nd November 2021 [para 3.4.3], the Government should activate automatic unblocking of ITC as quickly as possible.

[Nithyananda Shetty is Director with Deloitte Haskins and Sells LLP; and Preetika Shetty is Deputy Manager with Deloitte Haskins and Sells LLP. The views expressed are strictly personal.]

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