Goods & Services Tax (GST) in IndiaUnblocking of Input Tax Credit

INTRODUCTION

With the onset of the Goods and Services Tax (“GST”) era, a significant facet of the reformed indirect taxation structure of India is the availability of Input Tax Credit (“ITC”). ITC, being a key feature of GST, primarily symbolizes a mechanism to avoid the cascading effect of taxes, i.e., the ‘tax on tax’ phenomenon.

A key component of ITC is ‘input tax’, which refers to the GST charged on any supply of good and/or services which are used, or intended to be used during the course of or in the furtherance of business. Likewise, ITC essentially denotes the credit or reduction of input tax from the output tax liability of a taxable person.

In recent times, ITC has emerged to be the backbone of the GST regime as it enables the supplier of a final product to significantly reduce its GST burden by adjusting the input tax paid from the total output tax liability. Section 16 of the Central Goods and Services Act, 2017 (“CGST Act”) stipulates the eligibility and conditions for availing ITC, and Section 17 of the CGST Act provides for the apportionment of credit and blocked credit.

According to Section 17 of the CGST Act, ITC may be restricted or blocked to a certain extent when the goods or services or both are used partly for the purpose of business and partly for other purposes, and when the goods or services or both are used partly for effecting taxable supplies including zero-rated supplies and partly for exempt supplies.

Similarly, GST Officers are also authorized to block ITC available in the electronic credit ledger if they have reason to believe that the ITC was fraudulently availed or is ineligible, under Rule 86A of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”).

Sub-rule (3) of Rule 86A of the CGST Rules provides for the unblocking of such blocked ITC after the expiry of a period of one year from the date of blocking. Recently, the Department of Trade & Taxes, Delhi Government issued the Guidelines for Unblocking of ITC on expiry of one year from the date of blocking vide Circular No. F.3(429)/GST/Policy/2022/1067-1072 dated 08.03.2022 (“the Guidelines”).

This Blog shall discuss in detail the blocking and unblocking of ITC, and the criteria for unblocking of ITC laid down in the Guidelines.

BLOCKING OF ITC

Rule 86A of the CGST Rules was introduced vide Notification No. 75/2019 dated 26.12.2019, empowering GST Officers to restrict the ITC accessible in a taxpayer’s electronic credit ledger if the Officer has “reasons to believe” that the ITC was obtained unlawfully. This Rule was added to prevent the practice of false invoicing without actual supply of goods.

The ITC lying in electronic credit ledger may be blocked only by the Commissioner or an Officer authorized by the Commissioner, not below the rank of an Assistant Commissioner. The Commissioner is required to provide material evidence available or gathered on record which prima facie ascertains that the ITC was availed fraudulently or is ineligible.

Sub-rule (1) of Rule 86A of the CGST Rules stipulates certain conditions for the blocking of ITC availed through tax invoices or debit notes or any other document under Rule 36 of the CGST Rules:

1. The tax invoice, debit note or any other document was issued by a non-existent or non-operational registered person, not conducting any business from the place of registration.
2. The tax invoice, debit note or any other document was issued without the receipt of goods or services or both.
3. The tax charged in respect of the supply has not been paid to the Government by the supplier.
4. The registered person availing ITC is non-existent or non-operational and not conducting any business from the place of registration.
5. The registered person availing ITC does not possess the tax invoice, debit note or any other document under Rule 36 of the CGST Rules.

Rule 86A(3) of the CGST Rules prescribes a period of limitation of up to one year on the blocking of ITC by GST Officers. The restriction imposed under Rule 86A(1) of the CGST Rules ceases to have effect after the expiry of one year from the date of imposition.

UNBLOCKING OF ITC

The recent Guidelines issued by the Delhi Government highlight the current figures of ITC lying blocked by the GST Officers beyond a period of one year, which were blocked on account of mismatches/investigation/non-existence or receipt of alert notices, etc.

To address the issue of such blocked ITC, the Guidelines direct the Proper Officers to immediately take steps to finalize the investigation/proceedings in all such cases and either utilize the blocked credits against demands, or unblock the ITC.

The Guidelines stipulate the following indicative steps to be taken by the Proper Officer on immediate basis:

I. For taxpayers having active registration

• The Officer shall conduct immediate field visits to such GSTINs, and if the firm is found non-existing, the registration of the firm may be suspended and cancelled. A Show Cause Notice (DRC-01) would be issued and thereafter demand under DRC-07. Summary assessment under Section 64 of the CGST Act may also be undertaken. Thereafter, the blocked ITC would be unblocked and utilized towards payment of demand.
• In case the taxpayer is found to be existing during the field visit, a Show Cause Notice may be issued proposing to create demand by disallowing ITC to the extent fraudulently availed or ineligible. DRC-07 may be issued thereafter and ITC would be unblocked and used for the payment of demand.

II. For taxpayers with cancelled registration

• In case the registration of the person has been cancelled and the ITC blocked, the Officer should determine the reason for cancellation. If the reason was due to non-existing or non-functional person, the ITC availed would be disallowed and blocked ITC would be utilized.
• In case the registration was cancelled for reasons other than non-existing/non-functional firm, then the ITC to the extent believed to be availed fraudulently or ineligible would be disallowed and demand created. The blocked ITC would be unblocked and utilized for the payment of demand.

JUDICIAL PRECEDENTS

In Samay Alloys India Pvt. Ltd. v. State of Gujarat C/SCA/18059/2021, the Gujarat High Court held that the condition precedent for exercising the power under Rule 86A of the CGST Rules is the availability of credit in the electronic credit ledger, which is alleged to be eligible. If a credit balance is available, the Authority may, for reasons to be documented in writing, refuse to authorize the debit of an amount equal to that credit. However, the Authority does not possess any power to impose a negative ban on future credit.

The High Court observed that the power under Rule 86A of the CGST Rules cannot be invoked when ITC is not available in the electronic credit ledger. Proceedings can be initiated against fraudulent activities under Section 73 and 74 of the Act. Rule 86A of the CGST Rules does not debar a registered person from using the facility of making payments through the electronic credit ledger.

In Nipun A. Bhagat v. State of Gujarat R/SCA/14931/2020, the GST Authority had blocked the Writ Applicant’s ITC under Rule 86A of the CGST Rules to recover the taxes on another company where the Writ Applicant was a Director. The Gujarat High Court observed that Rule 86A of the CGST Rules can be invoked by the Commissioner, or an Officer authorized by him, by citing reasons to believe why ITC in the ledger has been fraudulently availed.

The High Court observed that in the present case, there were no reasons provided by the GST Authority for invoking Rule 86A of the CGST Rules. Relying upon various judgements, the High Court held that unlike Section 179 of the Information Technology Act, 2000; the Sales Tax Act, 1956 does not have a provision for fostering the liability of a company to pay tax on its directors. Thus, the High Court allowed the application in the favor of the Petitioner and ordered the GST Authority to unblock the ITC.

In Ambika Creation v. Commissioner, Govt. of Gujarat C/SCA/17564/2021, the Gujarat High Court held that once the ITC in electronic credit ledger is blocked, on the expiry of a period of one year, it would be automatically unblocked. In this case, even after the lapse of a period of one year, the GST Authority did not unblock the ITC and allow the taxpayer to use the pending ITC.

The Gujarat High Court held that after the expiry of the statutory period of one year, there is no discretion left on the GST Authority to not unblock the ITC. Only a fresh order would prevent the taxpayer from using the ITC available. The High Court also noted that the GST Authority would be held personally liable for the loss suffered by the taxpayer in case a similar case came up next time.

AMLEGALS REMARKS

The CGST Act and the Rules made thereunder enable a bonafide taxpayer to avail ITC by adjusting the value of input tax against their total output tax liability. Thus, the availability of ITC is essential to taxpayers under GST who receive input supplies for the provision of outward supplies.

However, many fraudulent practices have cropped up in recent times to avail ineligible ITC against their output supplies, or to claim refund of such ITC from the GST portal. To curb such practices, the Government introduced measures for the blocking of fraudulently availed ITC or ineligible ITC.

Taking into account the genuine concerns of the Government regarding fraudulent ITC, the GST Officers began to block ITC for numerous taxpayers even without a concrete “reason to believe”. This issue is seemingly resolved by Sub-rule (3) of Rule 86A of the CGST Rules, which provides for the unblocking of ITC after the lapse of a year.

Notwithstanding the limitation provided by Rule 86A(3) of CGST Rules, the GST Authority is yet to unblock ITC for numerous bonafide taxpayers. The Guidelines issued and the various judicial precedents provide a nudge forward in the right direction for the GST Officers to unblock such ITC in a time bound manner, ensuring that the taxpayers’ right to ITC is not prejudiced or hampered.

For any queries or feedback, please feel free to connect with chaitali.sadayet@amlegals.com or riddhi.dutta@amlegals.com.