GST: Power To Block Credit Mustn’t Be Used To Harass Taxpayers, Gujarat High Court Says
An official bangs a gavel. (Photographer: Andrew Harrer/Bloomberg)

GST: Power To Block Credit Mustn’t Be Used To Harass Taxpayers, Gujarat High Court Says

The power of GST authorities to block credit is drastic in nature and mustn’t be used to harass taxpayers, the Gujarat High Court has said. The court expressed the need for the government to issue guidelines and the procedure to be followed by GST authorities while exercising their powers to block utilisation of input tax credit by a registered taxpayer.

A bench comprising Chief Justice Vikram Nath and Justice JB Pardiwala was hearing a case relating to Rule 86A of the Central Goods and Services Tax Rules which allows GST authorities to block credit obtained from non-existing businesses or through fraudulent means.

The case emanates from an application filed by SS Industries—a Gujarat-based manufacturer of TMT bars—challenging the tax department’s move to block its utilisation of input credit against certain invoices and cancellation of debit entries in its electronic credit ledger for financial year 2016-17 and 2017-18.

The tax department had alleged that the firm availed credit on the basis of fake invoices, which were issued by its vendors without any supply of tax-paid inputs. The firm countered the allegations arguing that it regularly filed all tax returns and made remittances for supplies received from its vendors.

Though the court ruled in favour of the GST department, it observed that the powers under Rule 86A can’t be misused.

Rule 86A: Curbing Credit Frauds

The government notified Rule 86A with effect from Dec. 26, 2019, to curb the rising instances of credit fraud arising from fake invoices. Broadly, it allows a GST commissioner to restrict debit of an amount equivalent to the ineligible or fraudulently obtained tax credit in the electronic ledger. Any restriction imposed on a taxpayer can last for a maximum period of one year.

A commissioner can do so if:

  • Tax invoices or debit notes are issued by a supplier which either has no existence or isn’t conducting any business from a place for which it has obtained registration.
  • Invoice has been issued without any receipt of goods or services.
  • Input tax credit is availed on the basis of invoices or debit notes against supplies for which no tax has been paid to the government.
  • And lastly, if a business availing credit is non-existent or does not posses any tax invoice.

As many as two petitions challenging the legal validity of this rule are pending before the Gujarat High Court.

Rule 86A May Be Misused, High Court Says

Presently, the rules do not require the tax authorities to pass any specific order giving prima facie reasons for blocking credit.

Citing a few judgments of the Supreme Court emphasising on the need for checks and balances in tax laws, the high court has observed that the rule is prone to misuse in the absence of a proper procedure. And so, the court has laid down the following principles for the tax department:

  • Tax authorities must rely on credible material or information to arrive at a subjective satisfaction for exercising their powers to block tax credit.
  • Powers under Rule 86A are “drastic” and far reaching, and hence must be used sparingly.
  • These powers must not be used as a tool to harass a taxpayer or in a manner which has an irreversible and detrimental impact on the business. Absence of a proper guideline may have such an effect.
  • While utilisation of credit is a vested right of a taxpayer, no such right arises prior to availing the credit.

It has also observed that the findings in present case won’t affect the other petitions where the legal validity of Rule 86A has been challenged.

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