GST Rule 86A

Understanding GST Rule 86A: Updates for 2025

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Understanding GST Rule 86A: Updates for 2025 with Practical Examples

The Goods and Services Tax (GST) framework in India is dynamic, with frequent updates to ensure compliance, curb tax evasion, and enhance operational efficiency. One such critical regulation is Rule 86A of the CGST Rules, 2017, which empowers tax authorities to block Input Tax Credit (ITC) in certain cases. With recent updates in 2025, including significant clarifications from judicial rulings, understanding Rule 86A is crucial for businesses to stay compliant and optimize their tax strategies.

What is GST Rule 86A?

Introduced via Notification No. 75/2019 on December 26, 2019, Rule 86A of the CGST Rules, 2017 empowers the Indian government to combat fraudulent Input Tax Credit (ITC) claims under the Goods and Services Tax (GST) regime. This rule allows authorities to block ITC in a taxpayer’s electronic credit ledger if there are reasonable grounds to believe the credit was obtained fraudulently. The rule aims to prevent misuse of ITC through fake invoicing or other fraudulent practices, ensuring the integrity of the GST system. When invoked, authorities can block ITC, preventing taxpayers from using it to offset their tax liabilities until investigations are complete.

The primary objective is to curb tax evasion practices, such as fake invoicing, circular trading, or claiming ITC from non-compliant suppliers. The rule ensures that only legitimate ITC is used to offset tax liabilities, safeguarding the integrity of the GST ecosystem. As we move into 2025, updates to Rule 86A, including judicial clarifications and procedural enhancements, have made it a critical regulation for businesses to understand. When ITC is blocked under Rule 86A, taxpayers cannot use the restricted amount until investigations are complete, although they can continue to accumulate ITC in their ledger.

Updates to Rule 86A in 2025

In 2025, Rule 86A has been shaped by significant judicial and procedural developments, enhancing its clarity and fairness. Key updates include:

  • Supreme Court Ruling (June 2025): The Supreme Court upheld a Delhi High Court decision, dismissing a Special Leave Petition (SLP) by the Directorate General of GST Intelligence (DGGI). The ruling clarified:
    • No Negative Blocking: Authorities cannot block ITC beyond the available balance in the electronic credit ledger, protecting businesses from excessive restrictions.
    • Non-Retrospective Application: Rule 86A cannot be applied to ITC claims made before its introduction on December 26, 2019, ensuring fairness for past transactions.
    • Adherence to Natural Justice: Authorities must issue a reasoned order before blocking ITC and provide taxpayers an opportunity to respond, ensuring procedural transparency.
  • CBIC Circular (No. 250/07/2025-GST, June 24, 2025): This circular standardized the application of Rule 86A across jurisdictions, clarifying the roles of reviewing and appellate authorities. It emphasizes consistent and fair implementation of ITC restrictions.
  • Integration of Invoice Management System (IMS): Launched in 2025, the IMS allows businesses to accept, reject, or defer invoices on the GST portal, improving ITC verification and reducing errors that could trigger Rule 86A scrutiny.

Key Features of GST Rule 86A

  • Temporary Restriction: The block on ITC is not permanent and expires after one year unless extended through legal proceedings.
  • Reason to Believe: The officer must have credible evidence or suspicion of fraud, supported by documentation, to invoke the rule.
  • Written Justification: The reasons for blocking ITC must be recorded in writing to avoid arbitrary actions.
  • Unblocking of ITC: The restriction can be lifted if the officer is satisfied that the conditions for blocking no longer exist.
  • No Negative Blocking: The Supreme Court has clarified that Rule 86A does not permit negative blocking of ITC (blocking more ITC than available in the ledger).

 

Conditions for Blocking ITC in the Electronic Credit Ledger

The Commissioner, or an officer authorized by them (not below the rank of Assistant Commissioner), may block a taxpayer’s Input Tax Credit (ITC) in the electronic credit ledger if there is reason to believe the ITC was claimed fraudulently or is ineligible, based on the following conditions:

  • The tax invoice used to claim ITC was issued by a registered person who is non-existent or not conducting business from the registered place of business.
  • ITC is claimed on an invoice for which no supply of goods or services was received.
  • ITC is claimed on an invoice where the tax has not been paid to the government.
  • ITC is claimed by a registered person who is found to be non-existent or not conducting business from the registered place of business.
  • ITC is claimed without a valid tax invoice or debit note.

 

Implications of GST Rule 86A for Businesses

GST Rule 86A has significant implications for taxpayers, especially genuine businesses dealing with non-compliant suppliers. Here are the key impacts:

  • Cash Flow Challenges: Blocking ITC forces businesses to pay output tax liability in cash, straining working capital, especially for small and medium enterprises (SMEs).
  • Increased Compliance Burden: Businesses must maintain meticulous records, including invoices, payment proofs, and delivery challans, to avoid ITC blocks or to challenge them effectively.
  • Supplier Due Diligence: Taxpayers must verify the GST compliance of suppliers to avoid ITC blocks due to supplier defaults. This includes checking GSTR-2A/2B reconciliation and supplier registration status.
  • Legal Recourse: Businesses can challenge ITC blocks by filing writ petitions, as seen in cases like the Gujarat High Court ruling, where the court emphasized the need for evidence-based blocking to avoid malice in law.
Example of GST Rule 86A in Action

Let’s understand GST Rule 86A with a practical example:

Scenario: ABC Enterprises, a GST-registered manufacturer, purchases raw materials worth ₹10 lakh from XYZ Suppliers at a GST rate of 18%. The supplier issues an invoice for ₹11.8 lakh (₹10 lakh + ₹1.8 lakh GST). ABC Enterprises claims ITC of ₹1.8 lakh in its electronic credit ledger and files its GSTR-3B accordingly.

During an investigation, the GST authorities discover that XYZ Suppliers is a non-existent entity created to issue fake invoices. The authorities invoke GST Rule 86A and block the ITC of ₹1.8 lakh in ABC Enterprises’ electronic credit ledger, citing a reason to believe that the ITC was fraudulently availed due to a non-existent supplier.

Impact on ABC Enterprises:

  • ABC Enterprises cannot use the blocked ITC of ₹1.8 lakh to offset its output tax liability.
  • The company must pay the output tax liability in cash, affecting its working capital.
  • The block remains in place for up to one year or until the investigation concludes. If XYZ Suppliers is proven fraudulent, ABC Enterprises may lose the ITC permanently unless it can provide evidence of genuine transactions (e.g., payment proof via RTGS and delivery of goods).

Resolution: If the authorities find no further evidence of fraud or if ABC Enterprises provides valid documentation, the ITC is unblocked. If a notice is issued within one year, the block may continue until the legal process is resolved.

 

How to Ensure Compliance with GST Rule 86A
To avoid the adverse effects of GST Rule 86A, businesses can adopt the following best practices:
  • Supplier Verification: Regularly check the GSTIN status of suppliers on the GST portal to ensure they are active and compliant.
  • GSTR-2A Reconciliation: Reconcile ITC claims with GSTR-2A/2B to ensure invoices are reported by suppliers.
  • Maintain Documentation: Keep robust records of invoices, payment proofs (e.g., bank statements), and delivery documents to substantiate ITC claims.
  • Monitor GST Compliance: Use GST software to track returns, ITC claims, and supplier compliance to minimize discrepancies.
  • Seek Legal Advice: If ITC is blocked, consult a tax professional or file a writ petition to challenge arbitrary actions by authorities.

 

Legal Precedents and Recent Developments
The application of GST Rule 86A has been subject to judicial scrutiny. For instance:
  • Gujarat High Court Ruling: In a case involving an assessee challenging ITC blocking, the court held that Rule 86A can be invoked during investigations but requires a reason to believe supported by evidence. Arbitrary blocking without documentation is considered malice in law.

 

  • Supreme Court on Rule 86A: In 2025, the Supreme Court dismissed a Special Leave Petition (SLP) filed by the Directorate General of GST Intelligence (DGGI), upholding the Delhi High Court’s ruling that Rule 86A is prospective and does not allow negative blocking of ITC. This is a significant win for taxpayers, ensuring fairness in ITC restrictions.

These rulings emphasize the need for authorities to follow due process and provide evidence when invoking GST Rule 86A.