Rule 86A applies only to the credit available in the taxpayer’s ECrL, not to past ITC used for payments or refunded amounts, and does not require taxpayers to replenish their ECrL for past used ITC suspected of fraudulent availing

The Delhi High Court quashed orders under Rule 86A of the CGST Rules, 2017, blocking Input Tax Credit ( ITC ) beyond the credit available in the Electronic Credit Ledger ( ECrL ), noting that it creates an artificial negative balance and reduces working capital. Taxpayers registered under the Central Goods and Services Tax Act, 2017 ( CGST Act ) and the Delhi Goods and Services Tax Act, 2017 ( DGST Act ) have filed petitions challenging orders issued by the Commissioner, or an officer authorized under Rule 86A of the Central Goods and Services Tax Rules, 2017. The orders, which block input tax credit ( ITC ) in their Electronic Credit Ledgers ( ECLs ), have reportedly resulted in the creation of artificial negative balances exceeding the available credit. Consequently, the petitioners are unable to utilize their ITC for payment of dues until the negative balance is offset, leaving only the remaining ITC available for settling their dues. Ready to Grow? Choose a Course That Fits Your Goals! The petitioners argued that Rule 86A does not grant the authority to block ITC that is not available in the taxpayer’s ECL at the time. They maintain that a straightforward reading of Rule 86A limits the officer’s authority to block ITC only to the extent of the credit present in the ledger at the time of the order. The revenue, however, disputes this interpretation. According to the revenue, the Commissioner or the authorized officer has the power to block an amount equivalent to the ITC if there is a belief that it was fraudulently claimed or is otherwise ineligible. This block is not restricted to the balance available in the ECL at the time of the order and may exceed the amount in the ledger. Under this interpretation, the taxpayer cannot use or seek a refund for any ITC until the amount believed to be fraudulent or ineligible is blocked. Once blocked, only the ITC exceeding this amount can be used. Ready to Grow? Choose a Course That Fits Your Goals! It was notable that the petitioners, while raising other issues in their petitions, have limited their legal challenge to this specific issue, as acknowledged in the order dated August 22, 2024. The court emphasized Justice Vibhu Bakhru and Justice Sachin Datta clarified that Rule 86A applies only to the credit available in the  taxpayer’s ECrL, not to past ITC used for payments or refunded amounts, and does not require taxpayers to replenish their ECrL for past used ITC suspected of fraudulent availing. The High Court emphasized that Rule 86A should not be interpreted to allow debiting ECrL beyond available ITC, as this would force taxpayers to incur larger cash outflows, contradicting the statutory right of taxpayers to utilize validly availed ITC Ready to Grow? Choose a Course That Fits Your Goals! The court rejected the revenue’s argument for multiple interpretations of Rule 86A, favoring a purposive and literal interpretation that does not lead to absurdity, and established that blocking ITC requires specific conditions and not just a belief of fraudulent availing. The court highlighted that the power under Rule 86A is a drastic measure without a requirement for prior notice, intended to immediately block the usage of ITC if the Commissioner believes it has been fraudulently availed or is ineligible, distinguishing it from the process of availing ITC itself.