Rule 86A of the CGST Rules: An
Infringement on Natural Justice and Section 49(4)
The
introduction of Rule 86A in the Central Goods and Services Tax (CGST) Rules has
sparked considerable debate and criticism. This rule, which empowers tax
authorities to block a taxpayer's Input Tax Credit (ITC) under specific
conditions, has been seen as a measure that contravenes the principles of
natural justice and violates the provisions of Section 49(4) of the CGST Act.
Here’s an exploration of why Rule 86A is problematic and a discussion on
potential remedies for taxpayers.
Understanding Rule 86A:
Rule
86A allows tax authorities to disallow the use of ITC for a registered person
if there are reasons to believe that the credit has been fraudulently availed
or is ineligible. The rule lists several circumstances under which ITC can be
blocked, including cases where:
o
ITC
has been availed on the basis of invoices issued by a supplier who is found
non-existent.
o
The
credit has been taken without receipt of goods or services.
o
There
is evidence of fraud, willful misstatement, or suppression of facts.
Violations of Natural Justice
The
principle of natural justice mandates that no one should be condemned unheard
(audi alteram partem). Rule 86A, however, empowers authorities to block ITC
without providing an opportunity for the taxpayer to be heard. This can lead to
situations where the credit is blocked based on mere suspicion or incomplete
investigation, causing undue hardship to the taxpayer.
Lack of Prior Notice: The rule does not explicitly
require authorities to issue a prior notice before blocking the ITC. This
omission denies the taxpayer the chance to present their case or provide
clarifications before a decision is made.
Arbitrary Powers: The discretionary power given to
tax officials under Rule 86A can lead to arbitrary or biased decisions. Without
stringent guidelines or checks, this power can be misused, resulting in
unjustified blocking of ITC.
Contravention of Section 49(4)
Section
49(4) of the CGST Act allows a registered person to utilize ITC available in
their electronic credit ledger for making payments towards tax liabilities.
Rule 86A effectively overrides this provision by allowing the blocking of ITC,
which directly impacts the taxpayer's ability to utilize their legitimate
credit.
Conflict
with Legislative Intent: The CGST Act's framework is designed to ensure
seamless flow of credit in the GST system. Rule 86A disrupts this flow by
imposing restrictions that are not envisioned under Section 49(4).
Economic Impact: Blocking of ITC can severely
affect a business's cash flow and working capital, leading to economic strain.
This is particularly harsh for businesses that rely on ITC to offset their tax
liabilities.
Double tax payment: For the time being ITC blocked
it creates a situation where Assesse need to pay tax twice once to Vendor and
since ITC in credit ledger is blocked they need to pay again in cash to
government.
Alternative Remedies:
Claiming Interest: In situations where the blocking
of ITC is later found to be incorrect, taxpayers should have the right to claim
interest on the blocked credit. This would serve as a compensatory mechanism
for the financial strain endured during the period when the credit was unjustly
blocked.
Taxpayers
can seek redress by filing for interest on the amount of ITC wrongly blocked.
This can be done by approaching the relevant tax authority or tribunal,
presenting evidence of the incorrect blocking and the resulting financial
impact.
Judicial Recourse: Courts have previously ruled in
favor of taxpayers where ITC was blocked without just cause. Taxpayers can cite
these precedents to strengthen their case for claiming interest and
compensation.
Conclusion:
Rule
86A, while aimed at curbing fraudulent practices, often ends up penalizing
legitimate businesses by violating principles of natural justice and
contravening Section 49(4) of the CGST Act. The arbitrary blocking of ITC
without prior notice or hearing not only disrupts the smooth flow of credit but
also places undue financial burden on taxpayers. To address these issues, it is
crucial that the rule be revisited to incorporate safeguards that protect
taxpayer rights. Meanwhile, claiming interest on wrongly blocked ITC remains a
viable alternative remedy for aggrieved taxpayers, ensuring some measure of
justice and financial redress.
By
addressing these concerns, policymakers can ensure a more balanced and just
approach to tax administration, fostering greater trust and compliance among
taxpayers.
