Rule 86A of the CGST Rules, 2017

October 5, 2021 By newtaxindia Off

The complexities in GST Law are being unraveled with a tremendous speed which is evidenced by numerous judicial pronouncements rendered by High Court and Supreme Court. One of the prominent issues being challenged is the provision contained in section 16(2)(c) of the CGST Act, 2017 which requires that input tax credit can be availed only if the supplier has paid the tax charged on the invoice to the government. This provision mandates recipient of goods or services to ensure that compliance has been made by the supplier when there is no such mechanism on the GST portal to facilitate such verification. The constitutional validity of the provision contained in section 16(2)(c) of the CGST Act, 2017 is being challenged before the Hon’ble Calcutta High Court in the case of LGW Industries Ltd. v. Union of India [W.P. No. 23512 of 2019], Hon’ble Delhi High Court in the case of Bharti Tele media Ltd. v. Union of India [W.P. No. 6293 of 2019] and Tripura High Court in the case of Sahil Enterprises v. Union of India [2021] 129 taxmann.com 233. The present write up seeks to highlight the findings of the Hon’ble Tripura High Court during the course of interlocutory application filed for removing the lien imposed on electronic credit ledger for period beyond one year.
Rule 86A of the CGST Rules, 2017 facilitates the government in imposing restrictions on the utilization of the balance of electronic credit ledger of the recipient of goods or services where the Commissioner or officer authorized by him, have reasons to believe that the input tax credit has been obtained on the strength of invoices or documents which were issued fraudulently by non-existent supplier or the tax charged in respect of which has not been paid to the government or input tax credit was availed without receipt of goods or services or credit was availed without possession of valid tax invoice. It is clearly mentioned in Rule 86(3) that such restriction on utilization of the balance in electronic credit ledger shall cease to have effect after the expiry of one year from the date of imposing such restriction.


However, the Hon’ble Tripura High Court observed in the case of Sahil Enterprises (supra) that the provisional attachment of the electronic credit ledger under Rule 86A with respect to amount of Rs. 1,11,60,830/- was ordered on 21st May, 2020 which continued unto 14-9-2021. The High Court ruled that the restrictions that can be imposed on use of amount available in electronic credit ledger of a person can be by way of a temporary measure for a period not exceeding one year. This is an interim measure and, therefore, cannot take shape of a permanent arrangement. If the department wants to permanently disallow credit of accumulated amount in the ledger of a dealer, it must adjudicate the issue and pass an order after bi-prate hearing. The Hon’ble High Court noted that two things are significant in this sub-rule; first, there is no scope of extension of this time and secondly, upon expiry of period of one year, the effect of the restriction ceasing to take effect would be automatic. Hence, the restriction on the electronic credit ledger was released.


The above decision is yet another example of the abuse of the powers granted to the department which are to be cautiously exercised by them as it adversely effects the smooth functioning of the business of the assessee. It is pertinent to mention here that the provision contained in Rule 86A itself is being challenged before the Hon’ble Calcutta High Court in the case of MRS Reality (P.) Ltd. v. Union of India [W.P. No. 8142 of 2021] and so the validity of Rule 86A is sub-judice. Inspite of the fact that the provision contained in Rule 86A itself is being challenged, abuse of power to impose restrictions, that too, beyond the statutory period prescribed reflects pro-revenue attitude of the officers which only lead to harassment of the assessees.


If the fate of the provision contained in Rule 86A is predicted, the said rule can be very well co-related to the erstwhile provision contained in Rule 8(3A) of the Central Excise Rules, 2002 which stipulated that if an assessee defaults in payment of duty beyond thirty days from the due date, the assessee shall not be eligible to utilize cenvat credit for payment of duty and have to pay the duty consignment wise in cash. It is worth mentioning that the Rule 8(3A) of the Central Excise Rules, 2002 was declared as unconstitutional by Hon’ble Gujarat High Court in the case of Indus Global Ltd. v. Union of India. [2015] 53 taxmann.com 131/49 GST 445. Similarly, Hon’ble Madras High Court in the case of Malladi Drugs & Pharmaceuticals Ltd. v. Union of India [2015] 62 taxmann.com 275 has held that the condition contained in Rule 8(3A) of the Central Excise Rules, 2002 for payment of duty without utilisation of credit is contrary to the scheme of credit ailment under Cenvat Credit Rules, 2004 and is arbitrary and violative of Article 14 of the Constitution of India. This view was upheld by numerous High Courts in the erstwhile Central Excise Laws which indicates that the provision as regards restricting the utilization of credit is arbitrary and improper.


The rigours of the provision contained in Rule 86A of the CGST Rules, 2017 can be diluted only by favorable ruling by High Court as regard its validity in the GST Law. Until then, the assessees will have to bear the burden of litigation cost by knocking the doors of High Courts for seeking appropriate relief.