ADDITIONAL RESTRICTION ON ITC (BLOCK CREDIT)

Introduction

GST was introduced to remove cascading effect of taxes however, with the advent of new tax regime new frauds were emerging such as taking input tax credit against fake invoices or invoices without receipt of goods or services. According to sources, GST officials recently bust fake invoicing racket worth rupees 7896 crore in Delhi, where companies procured and generated invoices without actual supply of goods and avail as well as passed on input tax credit. Keeping in mind the amount of loss to the Government treasury, Government introduced new rules Rule 86A.

For simplicity, I have apprehended all measures taken by government along with relevant circular for reference regarding blocking of input tax credit:

	Notification No /			Description
	Circular / Section
	49/2019 CT Dated 09-		Insertion of new rule 36(4) To restrict ITC after matching (Maximum up to 120%
	Oct-2019		of eligible amount / 110% of eligible amount W.E.F 1-1-2020
	Circular 123 Dated 11-		Restriction of 36(4) will be applicable only on the invoices / debit notes on which
	Nov-2019		credit availed after 09.10.2019.
			New rule 86(A) inserted
			According to this rule The Commissioner or any other officer not below the rank
			of Assistant Commissioner authorized by him can restrict the ITC after having
			reasons to believe that credit of input tax available in the electronic credit ledger
			has been fraudulently availed or is ineligible:-
	75/2019 CT Dated		1.	if the input credit has been availed and the prescribed documents are not
				in possession of the tax payer or
	26.12.2019
			2. the if the due tax has not paid by the supplier or
			3. if the goods or services has actually not been received or
			4.	if the supplier is not in existence from the place it had taken registration
				etc.
			However, Such restriction shall cease to have effect after the expiry of a period of
			one year from the date of imposing such restriction.
			Blocking of ITC under rule 86(1)(a)
			1. Empowerà The CGST Officer to block ITC under certain circumstances.
			2. Facility: à All zonal chief commissioner have facility to block/unblock
				ITC availed in a situation covered under rule 86(A)(1)(A)of the CGST
	DGCI letter 587 Dated			Rules 2017 i.e. against fake invoices or against invoices without receipts
				of goods or services or Both.
	13.o1.2020
			3.	Operationalize :à
				(a) each Pr. Chief commissioner should appoint an officer of the rank od
				deputy commissioner /A.C , as a nodel officer , assisted by few more
				officers who should undertake this activity
				(b) Will submit daily report as per format to Pr DG DGCI HQ.
			CBIC unveils new app for exchange of information between Centre & State
	CBIC Tweet dated 07-		CBIC (Directorate of Data Management) launches an application for sharing
			information between Centre and State for targeted enforcement action against GST
	02-2020
			evasion; Terms is as a big leap in intelligence sharing and cooperative federalism:
			CBIC
			SOP to be followed by Exporter
			1. Several cases of monetisation of credit fraudulently obtained or ineligible credit
			through refund of Integrated Goods & Service Tax (IGST) on exports of goods
			have been detected in past few months.
			On verification, several such exporters were found to be non-existent in a number
	Circular 131 dated		of cases.
	23.01.2020		In all these cases it has been found that the Input Tax Credit (ITC) was taken by
			the exporters on the basis of fake invoices and IGST on exports was paid using
			such ITC.
			2.To mitigate the risk, the Board has taken measures to apply stringent risk
			parameters-based checks driven by rigorous data analytics and Artificial
			Intelligence tools based on which certain exporters are taken up for further verification. Overall, in a broader time frame the percentage of such exporters selected for verification is a small fraction of the total number of exporters claiming refunds. The refund scrolls in such cases are kept in abeyance until the verification report in respect of such cases is received from the field formations. Further, the export consignments/shipments of concerned exporters are subjected to 100 % examination at the customs port.

Rule 86A as introduced runs as under:

Rule 86A. Conditions of use of amount available in electronic credit ledger-

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as:

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

 i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

 ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.”

 (2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

 (3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

 From the above rule it is clear that before power under Rule 86A is exercised there must be a reason to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible qua the following reasons:

1. Supplier/Recipient found non-existent or not conducting business on its registered place: It has been availed on the basis of documents prescribed under Rule 36 i.e. tax invoice, debit note etc issued by a registered supplier who has been found non-existent or not to be conducting any business from any place for which registration has been obtained.

2. Non receipt of goods or services or both: It has been availed on the basis of documents prescribed under Rule 36 i.e. tax invoice, debit note etc without receipt of goods or services or both.

3. Tax not paid into the Government treasury: It has been availed on the basis of documents prescribed against which no tax has been paid into the Government treasury.

4. Availing of credit without documents: The registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36.

It would be interesting to see whether the mechanism of blocking of credit (as is currently done on the common portal by the Department) is adopted for exercising the power under Rule 86A   or some other mechanism is worked out.

The restriction in the Rule 86(A) though seems to be temporary but is drastic as it can be used if there is a reason to believe as to the grounds stated above and a final finding is not required as to eligibility or ineligibility of the credit. 

 However, before exercising this power reasons must be recorded in writing. Hopefully the drastic powers in the rule are exercised sparingly and not used as a routine matter in every case.

The Directorate General of GST Intelligence (DGGI) directs to Block disputed Input Tax Credit against Fake Invoices, Invoices without Receipt of Goods or Services and has issued directions to all Zonal Chief Commissioners on Blocking of Input Tax Credit under rule 86A(1)(a) of CGST Rules.

In a Communication issued to all Principal Commissioners of the State Department, the DGGI also directed that, all over India, should also make a Cell in their zone head office nominating one AD/DD rank officer as nodal officer assisted by a few other officers to block the credit of such avails received from their zonal CGST Chief Commissioner, who are located outside the jurisdiction of the concerned CGST Zone.

UPDATES

Ø  CBIC through Tweet dated 07- 02-2020 unveils new app for exchange of information between Centre & State CBIC (Directorate of Data Management) launches an application for sharing information between Centre and State for targeted enforcement action against GST evasion; Terms is as a big leap in intelligence sharing and cooperative federalism

Ø  Recently SOP to be followed by Exporter has been introduced through circular 131 dated 23.01.2020:

1.       Several cases of monetization of credit fraudulently obtained or ineligible credit through refund of Integrated Goods & Service Tax (IGST) on exports of goods have been detected in past few months. On verification, several such exporters were found to be non-existent in a number of cases. In all these cases it has been found that the Input Tax Credit (ITC) was taken by the exporters on the basis of fake invoices and IGST on exports was paid using such ITC.

2.       To mitigate the risk, the Board has taken measures to apply stringent risk parameters-based checks driven by rigorous data analytics and Artificial Intelligence tools based on which certain exporters are taken up for further verification. Overall, in a broader time frame the percentage of such exporters selected for verification is a small fraction of the total number of exporters claiming refunds. The refund scrolls in such cases are kept in abeyance until the verification report in respect of such cases is received from the field formations. Further, the export consignments/shipments of concerned exporters are subjected to 100 % examination at the customs port.

Conclusion

From above it can be concluded that Govt. is very strict about GST compliance and made retrospective amendment to levy equal penalty for ITC on fake invoices in this budget. Further presently huge amount of ITC as well as GST refund is under hold for verification because of such ITC.

Now CBIC launches application for sharing information between Centre and state for targeted enforcement action against GST evasion. Accordingly, all assessee need to ensure strict discipline in selection of supplier with proper due diligence before executing any transaction otherwise it may create trouble in future. Moreover, purchase condition can be modified by inserting appropriate payment clause after matching only.

From above it can be concluded that every client should keep their system as per GST compliance requirement and keep the business relation with 100% GST complied supplier to avoid such additional restriction like blockage of ITC, Blockage of e way bill etc. Govt. action are in right direction for such targeted defaulters by introducing measures to apply stringent risk parameters-based checks, driven by rigorous data analytics’, artificial intelligence tool to taken up further verification. The Institute of the Chartered Accountants of India can become system partner in development of system base Audit tool in saving leakage of revenue by undue means and smooth compliance timely. Business long-term survival with peace will be based on 100% GST compliance on real-time basis and CA can help in optimization by keeping updated knowledge on GST as well as system