Analyzing Rule 86A of CGST Rules after the introduction of guidelines by CBIC
The article ‘Analyzing Rule 86A of CGST Rules after the introduction of guidelines by CBIC’ by Harshita Pareek explores to find out whether the guidelines have succeeded in addressing the challenges to Rule 86A. Actually, Rule 86 A empowers the officers not below the rank of the additional commissioner to impose curtailment on Input Tax Credit. The Article… Read More »
The article ‘Analyzing Rule 86A of CGST Rules after the introduction of guidelines by CBIC’ by Harshita Pareek explores to find out whether the guidelines have succeeded in addressing the challenges to Rule 86A. Actually, Rule 86 A empowers the officers not below the rank of the additional commissioner to impose curtailment on Input Tax Credit. The Article in-depth with the help of case laws proves that Rule 86 A is violative of a fundamental right as there has not been any provision enshrined regarding the power of appeal by the assessee against an order passed under Rule 86 A.
The author explains with the judgment passed by the supreme court in the context of the importance of a fair hearing and through the above-mentioned Rule that the assessee is unfortunately denied such right. The Author agrees with this aspect that Rule 86 in no way can be referred to as ultra-vires of the CGST Act. Thus, the Article sums up that the CBIC guidelines gave clarity to all the aspects of Rule 86A of CGST.
Introduction: Rule 86 A of CGST
Rule 86A was added to the CGST Rules, 2017 on December 26, 2019. The said provision gives the Commissioner or an officer authorized by him with a rank not lower than that of an Additional Commissioner, broad powers to impose restrictions on Input Tax Credit (ITC) in cases where he has reason to believe that the ITC has been fraudulently obtained or is ineligible. If the conditions for disallowance no longer exist or if one year has passed since the imposition of such restriction, such officer may unblock the same.
This Rule was inserted to curb the malpractice of fake invoicing without an actual supply of goods.[1] However, the GST field officers resorted to rule 86A and started blocking input tax credit of the whole supply chain under the GST framework if even one of the vendors or suppliers has missed out on filing requirements, impacting several corporates, and prompting some to consider legal recourse.[2] As a result, the credit has been blocked without even finishing the audit, or reviewing the assessor’s responses. Several writs have been filed by assessees against such blocking.
A writ petition was filed in the case of Kalpsutra Gujarat v. Union of India[3] to strike down Rule 86A insofar as being ultra vires of the CGST Act. The Court noted the possibility of the revenue authorities misusing the Rule to harass the taxpayer and directed that proper guidelines be issued outlining the procedure to be followed in order to invoke Rule 86A.
Further, in the case of S.S. Industries v. UOI[4], the honorable Gujarat High Court held that
“Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to the 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.”[5]
In response to such court decisions, the CBIC has issued detailed guidance for officers exercising Rule 86A powers. The CBIC has addressed the grounds for disallowing debit of an amount from an electronic credit ledger, proper authority for Rule 86A purposes, and the procedure for disallowing debit of an electronic credit ledger or blocking credit under Rule 86A.
Whether Rule 86A is violative of fundamental rights?
The power under rule 86A is administrative with quasi-judicial hues and has civil consequences for a taxpayer in the sense that it acts as an obstruction to the right of a taxpayer to utilize the credit available in his Electronic Credit Ledger (ECL).[6] Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness.[7] The jurisprudence developed by courts and the guidelines has to some extent bought clarity to the application of Rule 86A.
For instance, before the issuance of the guidelines the threshold in order to block ITC under Rule 86A only required “reasons to believe” in order for the officer to block a recipient’s ITC. The threshold was very subjective and was left at the whims and fancy of the officer in charge. This was unreasonable and violative of Article 14 of the Constitution of India as this practice, at many times led to blocking ITC even in cases where the justification for mismatch was genuine. The guidelines addressed this problem by laying down proper grounds for disallowing debit of an amount from ECL.
However, there are still certain gaps that need more detailed directions. Rule 86A is structured and designed in a way that it at times has subjected bona fide assessees to undue hardship by blocking their credit ledger, where credit was rightfully claimed, due to the default of their supplier. This is equivalent to equating the recipient’s default with that of the supplier.
The court in the case of Maneka Gandhi v. Union of India[8], held that
the principle of reasonableness which is legally as well as philosophically is an essential element of equity or non-arbitrariness and it pervades Article 14 like a brooding omnipresence.[9]
In this light asking a recipient who entered into purchase transactions with a bona fide intent and with validly registered dealers who have issued tax invoices against the transaction, to anticipate whether or not the supplier will deposit the tax collected to the Government is utterly unreasonable and therefore violative of Article 14 of the Constitution of India.
Further, Rule 86A is violative of Article 21 of the Constitution of India as it fails to prescribe a procedure to appeal against the order passed under the rule. An appeal under Section 107(1) can only be filed against a decision or order passed under the CGST Act, SGST Act, or UTGST Act by an adjudicating authority but not against any decision or order passed under the rules framed under the CGST Act or any other rules[10], including orders passed under Rule 86A of the CGST Rules.
This is violative of Article 21 of the Indian Constitution because Article 21 provides that a procedure established by law should be reasonable, fair, and just[11] and fair procedure calls for the right to appeal.[12] Since Rule 86A fails to prescribe a procedure for an assessee to prefer an appeal against an order passed under Rule 86A, the rule is violative of Article 21 as well.
Whether Rule 86A is violative of the principle of natural justice?
The principle of audi alteram partem, which is an important element of the principle of natural justice, provides that no person should be judged without a fair hearing and each party must be given the opportunity to respond to the evidence against them. The Supreme Court in Nawabkhan Abbaskhan v. State of Gujarat[13] held that an order which infringes fundamental freedom passed in violation of the audi alteram partem rule is a nullity.
In pursuance of natural justice, the revenue officers are required by section 73 of the CGST Act to provide an assessee with notice and an opportunity to be heard. However, Rule 86A circumvents the provision of Section 73, as the officer restricting credit is not required to give a show-cause notice to the assessee for an order passed under Rule 86A. Since Rule does not provide for serving a show-cause notice assessee is denied a fair opportunity to represent her side, conversely being denied the fundamental right to be heard. Thus, Rule 86A is violative of the principle of natural justice.
Whether Rule 86A ultra vires of CGST Act?
The CGST Rules are based on the powers granted by the CGST Act of 2017. Section 16 of the Act places restrictions on credit availment and allows for reversal in circumstances where credit has been misused. It has been held that
“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.”[14]
In this light, it has been argued that Rule 86A is ultra vires of Section 16 of the CGST Act as it is a delegated legislation that gives the power to block the Input Tax Credit at no fault of the registered recipient.[15] However, with the introduction of guidelines proper authority and procedure have been prescribed for the authorities to block ITC under Rule 86A. In addition to this, the legal right provided under section 16 CGST Act is not an absolute right. Section 16(1) which grants eligibility to avail of ITC benefit, before allowing any such benefit, speaks about “conditions and restrictions as may be prescribed”.
The Apex Court in the case of M/S. TVS Motor Company Ltd. v. The State of Tamil Nadu And Others[16], with respect to the nature of ITC under the CGST act held that
“…right to claim ITC is not a vested right or an indefeasible right. It is a benefit conferred under the Act in certain contingencies and subject to conditions prescribed in the statutory scheme. Therefore, it is open to the State Legislature to provide for conditions and restrictions while extending the concession. Likewise, it was also necessary for any assessee to claim input credit to fulfill those conditions.”[17]
Noting that detailed guidelines have been issued for blocking ITC and it is not an absolute right, Rule 86A cannot be said to be ultra vires of Section 16 of the CGST Act.
Whether Rule 86A is violative of constitutional rights?
It has been argued that Rule 86A is violative of Article 300A of the Constitution. The court in the case of A.B Pal Electricals Pvt. Ltd. v. Union of India held that
the credit standing in favour of an assessee is property and the assessee could not be deprived of the said property save by authority of law in terms of Article 300A of the Constitution of India.
However, the right to claim ITC is in the nature of concession or benefit granted to a registered person and is not an absolute right. [18] The legislature has conveyed its intention very clearly that ITC benefit can be withdrawn by the department if these conditions do not comply with both letter and spirit.[19] ITC which has been claimed fraudulently does not fulfill the conditions under sections 16, 17, and 18 of the CGST Act. Since conditions under sections 16, 17, and 18 are not fulfilled the right to claim ITC does not get vested, and therefore blocking the same could not be violative of Article 300A of the Constitution.
Conclusion
The broad guidelines have surely helped in bringing clarity with respect to various aspects of Rule 86A. Further, there is no doubt that guidelines to a great extent have reduced the litigation for honest taxpayers who were facing hardships at the hands of GST officers.
However, the guidelines or rules still do not provide for the opportunity of notice/ hearing before blocking the ECL and subjects a bona fide assessee to undue hardships which as discussed above is violative of the fundamental rights of the assessee. This rule is contrary to the basic principles of natural justice and should be looked into by the government. Issuance of more circulars to provide guidelines may not completely serve the purpose. Hence, the need of the hour is to bring amendments in Rule 86A which address the constitution.
References
[1] CBIC Guidelines on Blocking of Credit under Rule 86A Vide Circular No.04/2021, Available Here [2] Sachin Dave S, Input Tax Credit Blocked for Even Minor Lapses, Available Here[3] (2020) 9 TMI 352
[4] 2020 (12) TR 3638.
[5] Ibid.
[6] Dee Vee Projects Ltd. v. The Government of Maharashtra & Ors, 2022 (2) TR 5065
[7] Ibid.
[8] Maneka Gandhi v. Union of India, AIR 1978 SC 597
[9] Ibid.
[10] Dee Vee Projects Ltd. v. The Government of Maharashtra & Ors, 2022 (2) TR 5065.
[11] Maneka Gandhi v. Union of India, AIR 1978 SC 597
[12] MH Hoskot v. State of Maharashtra, AIR 1979 SC 1548
[13] (1974) 2 SCC 121
[14] Eicher Motors Ltd. v. Union of India, 1999 (106) ELT 3 (SC)
[15] Ibid.
[16] (2018) INSC 912.
[17] Ibid.
[18] CA (Dr) Ayoush Saraf A, Input Tax Credit under GST Law- Is It a Vested Right?, Available Here [19] ALD Automotive Pvt. Ltd. v. The Commercial Tax Officer & Ors., (2019) 13 SCC 255
