[By Runit Rathore & Amal Shukla]
The authors are students of Hidayatullah National Law University, Raipur.
INTRODUCTION
“Rule 86A of the Central Goods and Services Tax Rules (CGST Rules), 2017 is not a machinery provision for recovery of tax or dues under the Central Goods and Services Tax Act” (CGST Act). Rule 86A of the CGST Rules grants the Commissioner or any other officer authorized by him, not below the rank of Assistant Commissioner, to block utilization of Input Tax Credit (ITC) upon the satisfaction of specific conditions stipulated under the said rule. It was inserted through the Central Goods and Services Tax (Ninth Amendment) Rules, 2019.
Rule 86A of the CGST Rules was inserted with the aim to curb the increasing fake invoicing incidents to avail ITC. Section 74 of the CGST Act also deals with the problem of counterfeit invoicing and it aims to address and deter efforts by taxpayers to evade taxes, claim excessive input tax credits, or secure unwarranted tax refunds through fraudulent actions, intentional misrepresentation, or suppression of facts. Under Rule 86A of the CGST Rules, a taxpayer’s ledger can be blocked even prior to the conclusion of proceedings under Section 74 of the CGST Act.
The provision of Rule 86A was added to give powers to the authorities to curb the menace of fake invoicing and abuse of ITC. However, the provision with benevolent aims ended up giving excessive and arbitrary powers to the authorities. This article critically examines the potential for abuse of the power conferred by Rule 86A of the CGST Rules and how it violates the principles of natural justice. It further delves into the concept of borrowed satisfaction and addresses the issue of negative blocking. Finally, it evaluates the wider implications of Rule 86A on the interests of the Assessee.
ABUSE OF AUTHORITY: DARK SIDE OF RULE 86A
Rule 86A of the CGST Rules gives overreaching powers to the authorities as it allows them to block Electronic Credit Ledger (ECL) on the basis of their subjective discretion or voluntary satisfaction, without requiring objective evidence or prior notice to the assessee. Further, the text of Rule 86A does not provide for any checks and balances against the use of this power. Unlike Section 73 and 74 of CGST Act, the text of Rule 86A does not provide an opportunity for the assessee to present his case against the blocking of electronic ledger. The text of Rule 86A is such that it remains subject to discretionary abuse by the authorities. It is a sound rule of interpretation that a statute should be so construed as to prevent mischief and to advance the remedy according to the true intention of the makers. Since its inception, Rule 86A of the CGST Rules has been susceptible to misuse in several ways, including blocking input tax credit based on borrowed satisfaction, freezing the ECL without affording the assessee an opportunity to be heard, and imposing negative blocking.
JUDGEMENT ON BORROWED SATISFACTION:
The issue of borrowed satisfaction arises when an officer, as provided under Rule 86A of the CGST Rules, blocks the electronic ledger of an assessee who is relying on the satisfaction of another officer or an officer having command over him. For the application of Rule 86A, the officer must have reason to believe which must be formed based on his own inquiry and satisfaction and not on satisfaction borrowed from any other officer. In this context, it is necessary to refer to Circular No. CBEC-20/16/05/2021-GST/1552 (hereafter Circular) dated 02.11.2021, wherein it has been stated that for blocking of ledger under Rule 86A the CGST Rules the concerned officer has to apply his mind and consider all necessary facts including the nature of fraud. Nevertheless, tax officers have acted arbitrarily and blocked accounts either being compelled by superior officers or relating to the satisfaction of another officer. The Karnataka High Court, addressing the issue of borrowed satisfaction in the case of K-9 Enterprises v. The State of Karnataka has stated that it is incumbent upon the officer (as referred in Rule 86A) to arrive at his own satisfaction by proper application of mind. Again, the Rajasthan High Court in a Sumetco Alloys v. Deputy Commissioner (Sumetco Alloys), held that the blocking of the ITC ledger should be kept in abeyance as it was based on borrowed satisfaction.
BLOCKING WITHOUT DUE PROCESS: A BREACH OF JUSTICE
Rule 86A of the CGST Rules also departs from the natural law principle of Audi Alteram Partem (let the other side be heard) and does not provide any opportunity for the assessee to present his case against blocking of his ITC ledger. Although the text of Rule 86A does not explicitly provide for a chance to be heard before blocking the ITC ledger, nevertheless it shall remain subject to principles of natural justice. Furthermore, as provided in the Circular, blocking as contemplated under Rule 86A cannot be arbitrary and has to be based on reason to believe formed by application of mind. Nevertheless, the income tax authorities have violated the principles of natural justice and have blocked the assessee’s ITC ledgers without granting them an opportunity to be heard. Further in Sumetco Alloys, where the ECL was blocked under Rule 86A without hearing the assessee, the court observed that blocking of electronic ledger without giving notice to the assessee and hearing was in violation of principles of natural justice. Further it was held that, even though the rule does not expressly incorporate the principles of natural justice, competent authority is obliged to hear the affected person.
EXCEEDING LIMITS BY NEGATIVE BLOCKING
Rule 86A of the CGST Rules has two aspects i.e. Positive Blocking and Negative Blocking. Positive Blocking refers to the restriction imposed by tax authorities on the ECL of a taxpayer, preventing the utilization of a specific amount of ITC suspected to be fraudulently availed. On the other hand, Negative blocking under Rule 86A refers to a situation where the authorities block an amount in the taxpayer’s ECL that is more than the balance available in the ledger. In Best Crop Science Pvt. Ltd. V. Principal Commissioner, CGST, the Delhi High Court held that when the (i) the Credit of Input tax is not available in ECL or (ii) the credit has been utilised, the powers under Rule 86A cannot be exercised by the Commissioner. So, it is necessary that there must be ITC available in the ECL in order to invoke powers under Rule 86A of the CGST Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal. If there is a credit balance available then only the authorities may not allow credit amount available, however no power is conferred to block credit from being availed in the future.
The guiding principle of the Goods and Services Act (GST Act) is to facilitate ease of doing business in India. But the problem of negative blocking hinders the same. Rule 86A poses challenges to the efficient and seamless operation of businesses. The negative blocking of ECL compels a taxpayer to pay their entire liability in cash, including the blocked ITC. Such recovery amounts to forced collection and shifts from the framework outlined in the GST Act. Through negative blocking, the authorities attempt to recover the falsely availed ITC, which violates the principles of natural justice, fairness, and transparency. Instead of achieving the intended objectives, negative blocking under Rule 86A of the Rules obstructs business operations. This practice is arbitrary, inconsistent to administrative law principles, and harmful to public interest.
IMPACT OF ECL BLOCKING ON ASSESSEE
Electronic Credit Ledger (ECL) plays an important part for businesses as it serves to be a record of ITC. When a registered person claims a new ITC, the corresponding amount is credited to the ECL, and when the ITC is utilized by the assessee to offset tax liabilities, the ledger gets debited accordingly. When the ECL is blocked by the authorities, the assessee is unable to update the ledger, which restricts their ability to avail credit for discharging liabilities under the CGST Act and preventing them from filing returns.
This restriction disrupts their ability to manage cash flow effectively, as they may be compelled to pay taxes in cash due to the inability to utilize ITC. Consequently, the blocking of the ECL adversely impacts the business’s financial health and compliance standing within the GST framework. In Dee Vee Projects Ltd. v. Government of Maharashtra, the Bombay High Court held that the credit available in the ECL constitutes the taxpayer’s property, and blocking it is equivalent to an unlawful provisional attachment under Section 83 of the CGST Act.
CONCLUSION
In conclusion, Rule 86A of the CGST Rules was introduced to prevent misuse of ITC and curb fake invoicing. However, in implementation it has often led to misuse, causing unnecessary suffering to businesses as it lacks adequate safeguards. Various issues, such as arbitrary blocking of ITC ledgers without giving taxpayers an opportunity to be heard, reliance on borrowed satisfaction, and negative blocking, have violated the principles of natural justice and hindered business operations. To address these challenges, safeguards must be added to ensure transparency, fairness, and proper checks on the use of power under Rule 86A. Also, providing taxpayers an opportunity to present their case, requiring well-reasoned decisions, and holding authorities accountable can help balance enforcement with ease of doing business, ensuring the rule achieves its intended purpose without harming genuine taxpayers.