KARNATAKA HIGH COURT RULES: ITC BLOCKING UNDER RULE 86A CANNOT CONTINUE BEYOND ONE YEAR

In a significant development under GST jurisprudence, the Karnataka High Court has held that the restrict on imposed by blocking a taxpayer’s Electronic Credit Ledger under Rule 86A of the CGST Rules, 2017 cannot con new beyond the statutory period of one year. Any con nua on of such blocking a er the expiry of the prescribed period is illegal and without authority of law. This ruling provides important relief to taxpayers who face prolonged restrict ons on the u Lisa on of their Input Tax Credit (ITC). 1) Understanding Rule 86A under GST Rule 86A of the CGST Rules empowers GST author as to block the u Lisa on of ITC available in a taxpayer’s Electronic Credit Ledger (ECL) if the officer has “reasons to believe” that such credit has been:  Fraudulently availed  Availed based on fake invoices  Availed without receipt of goods or services  Availed from non-existent suppliers  Otherwise ineligible under GST law The provision is intended to act as a prevent safeguard for protect ng government revenue during invest ga ons. However, since blocking ITC directly impacts the working capital of businesses, the law also provides safeguards to prevent misuse of this power. 2) Statutory Time Limit under Rule 86A Rule 86A(3) clearly provides that any restric on imposed on the electronic credit ledger shall cease to have effect a er the expiry of one year from the date of such restric on. This means:  Blocking of ITC is temporary in nature.  The restric on automa cally lapses a er one year.  Authori es cannot extend or con nue the blocking beyond this period. 3) Observa ons of the High Court The Karnataka High Court emphasized that: 1. Rule 86A is a preven ve mechanism and not a tool for recovery of tax. 2. The restric on is strictly me-bound, and the law does not permit con nua on beyond one year. 3. Any a empt by authori es to con nue blocking ITC a er one year violates the explicit provision of Rule 86A(3). 4. If the department believes the credit has been wrongly availed, it must proceed through proper adjudica on under the Central Goods and Services Tax Act, 2017, par cularly under Sec ons 73 or 74. 4) Implica ons for Taxpayers This judgment strengthens taxpayer protec on against indefinite ITC blocking. Businesses should take note of the following: 1. Track the Date of ITC Blocking Taxpayers should maintain records of the date on which the restric on under Rule 86A was imposed. 2. Check if One Year Has Expired If the blocking con nues beyond one year, the restric on may be challenged as unlawful. 3. Seek Legal Remedy if Required In cases where authori es con nue the restric on despite expiry of the statutory period, taxpayers may consider filing represent ons or seeking judicial relief. 5) Conclusion The decision of the Karnataka High Court reinforces an important principle of tax administrant: powers granted to authori es must be exercised strictly within the limits prescribed by law. By holding that ITC blocking under Rule 86A of the CGST Rules, 2017 cannot con nue beyond one year, the Court has ensured a balanced approach—protecting government revenue while safeguarding genuine taxpayers from prolonged restrict on. For businesses opera ng under the Central Goods and Services Tax Act, 2017, this ruling highlights the importance of monitoring compliance ac ons and asser ng legal rights when statutory limits are exceeded.