BLOCKING OF ITC UNDER THE RULE OF 86A AND ITS REMEDIES

Introduction

Input Tax Credit (ITC) is a fundamental feature of the Goods and Services Tax (GST) regime. It enables registered taxpayers to reduce their output tax liability by claiming credit of GST paid on inputs, capital goods, and input services used during business. However, to curb tax evasion and fraudulent practices, the GST law empowers tax authorities to restrict the use of ITC in certain cases. One such provision is Rule 86A of the CGST Rules, 2017, which allows temporary blocking of ITC.

Meaning of Input Tax Credit (ITC)

Input Tax Credit refers to the credit of GST paid on purchases that can be utilized to pay GST on outward supplies. ITC helps avoid cascading of taxes and ensures tax is levied only on value addition.

Blocking of ITC Under Rule 86A – An Overview

Rule 86A authorizes the GST department to block the utilization of ITC available in the Electronic Credit Ledger if the proper officer has “reasons to believe” that such credit has been fraudulently availed or is otherwise ineligible. The blocked credit cannot be used until the restriction is lifted.

Circumstances When ITC Can Be Blocked

The ITC may be blocked under Rule 86A in the following situations:

1. Fake or Non-Existent Supplier

If ITC is availed based on invoices issued by a supplier who is non-existent or not conducting any genuine business.

2. Non-Receipt of Goods or Services

Where goods or services were never actually received, but ITC has been claimed merely based on invoices.

3. Tax Not Paid to the Government

If the supplier has collected GST but failed to deposit the same with the Government.

4. Fraudulent Availment of ITC  

Where ITC is claimed without possession of a valid tax invoice or mandatory invoice particulars such as GSTIN of supplier and recipient, invoice number, date, and description of goods or services.

Consequences of Blocking ITC

Once ITC is blocked under Rule 86A:

• The taxpayer cannot utilize the blocked ITC for payment of output GST.

• The ITC cannot be claimed as a refund.

• The amount remains frozen in the Electronic Credit Ledger until unblocked.

  
  

Duration of ITC Blocking

• ITC can be blocked for a maximum period of one year from the date of restriction.

• After one year, the restriction automatically lapses.

• The proper officer may unblock the ITC earlier if satisfied with the taxpayer’s explanation.

  
  

Remedies Available Against Blocking of ITC

1. Application for Unblocking (Representation to Officer)

The taxpayer may submit a written representation to the jurisdictional officer along with supporting documents such as:

• Proof of genuine purchase

• E-way bills and delivery challans

• Goods Receipt (GR/LR)

• Supplier’s GSTR-1 filing status

• Bank statements showing payment to supplier

  
  

  The taxpayer may request revocation of the ITC block based on this evidence.

  
  

2. Coordination with Supplier

If ITC is blocked due to non-payment of tax by the supplier:

• Request the supplier to file pending GSTR-1 and GSTR-3B returns.

• Obtain confirmation or proof of tax payment.

  
  

  This is often the fastest and most practical remedy.

  
  

3. Filing of Appeal

If the department passes a formal order rejecting the request for unblocking:

• An appeal can be filed under Section 107 of the CGST Act.

• Time limit: 3 months from the date of order.

• Common grounds include:

  • No proper reasons recorded

  • Violation of principles of natural justice

  • Blocking of ITC without adequate evidence

    
    

4. Writ Petition Before the High Court

In cases where ITC is blocked:

• Without recording reasons

• In a mechanical or arbitrary manner

• Beyond the statutory period of one year

• Without granting an opportunity of hearing

A Writ Petition under Article 226 of the Constitution can be filed. Courts have consistently held that ITC cannot be blocked arbitrarily and must be supported by valid reasons recorded in writing.

Key Judicial Pronouncement

Dee Vee Projects Ltd. – Gujarat High Court

The Court held that:

• ITC is a valuable right and forms part of the taxpayer’s property.

• ITC cannot be blocked without valid and recorded reasons.

• Blocking cannot exceed the available credit balance.

• Arbitrary use of Rule 86A is not permissible.

  
  

Practical Tips to Avoid ITC Blocking

• Engage only with reliable and compliant suppliers.

• Regularly reconcile ITC with GSTR-2A and GSTR-2B.

• Ensure suppliers file GSTR-1 and GSTR-3B on time.

• Maintain proper documentation including:

  • E-way bills

  • Proof of receipt of goods/services

  • Payment proofs

  • Complete and valid tax invoices

    
    

Conclusion

Rule 86A is a preventive measure designed to curb fraudulent ITC claims, but its misuse can severely impact genuine businesses. Taxpayers must remain vigilant, maintain proper records, and act promptly if ITC is blocked. Understanding available remedies and judicial safeguards ensures protection against arbitrary action by tax authorities.