Kerala issues first guidelines on blocking/unblocking of Input Tax Credit

Circular bases on ‘Rule 86A’ of GST Rules; experts say CBIC should ensure its uniformity across the nation

Kerala has come out with detailed circular and Standard Operating Procedures (SoP) to streamline the process of blocking/unblocking of Input Tax Credit (ITC). Kerala is the first state to issue such a circular and experts expect that other States too will come out with a similar mechanism so that companies with multi-State operations will not have any problem.

It may be noted that Haryana did come out with a guideline on the same theme, but that was before the insertion of rule 86A in GST Rules related to blocking of ITC and controlling the menace of fake invoices. The said rule, introduced through a notification dated December 25, 2019, prescribes conditions of use of amount available in electronic credit ledger.

CA Aditya Singhania, Partner with Singhania’s GST Consultancy said that rule 86A envisages the “scenarios” wherein credits can be blocked and nothing beyond that. “Later, a press release by the GST Council Secretariat on March 6, 2020, proposed for further examination of its SoP,” he said.

The circular instructs cases, where credit has been availed on basis of tax invoices or debit- notes but tax has not been paid to the government, are to be identified from the red flag reports. It outlines mechanisms for blocking in various cases i.e. cases initiated by Jurisdictional officers / proper officers, requests received from the Central Board of Indirect Taxes and Customs (CBIC), and requests from State Officers regarding CBIC administered taxpayers.

It talks about procedures to be followed by an authorized officer for the determination of fraudulent credit to be blocked and redressal of representations received from taxpayers against blocking of credit. If there is NIL or insufficient balance in tax head to which credit is to be blocked, credit available in other heads, equivalent to the amount fraudulently availed can be blocked, subject to limitations imposed on cross-utilization of ITC. It explains that nothing prevents the proper officer from taking suitable actions under the GST law including determination of tax, demand, and recovery, provisional attachment of property, etc.

“ITC blocking is a temporary step and should not be seen as equivalent to the recovery of tax,” the circular said.

The matter of blocking ITC based on rule 86A has seen a number of court cases. In one such case (Aryan Tradelink vs Union of India), Karnataka High Court ruled that Revenue’s action of blocking electronic credit ledger for a continuous period of more than 1 year is ‘impermissible in light of Rule 86- A (3)’ and set aside Revenue’s order. Another matter (Surat Mercantile Association Vs Union of India) is pending in Gujarat High

Commenting on the new circular, Harpreet Singh, Partner at KPMG feels it is a good step as it streamlines the procedure to be followed by officers across the State and in a way reduces the subjectivity involved in the entire process. “On the flip side, if other States also follow suit, and issue similar guidelines, it would be interesting to see if the guidelines and process prescribed is similar, so that companies operating across States, need not worry about different practices being followed by officers in each of the States, “he said.

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“A similar clarification from CBIC would ensure uniformity across the nation, “Singhania added.