Tax Vista

Your weekly tax recap

Edn. 279 - 16th March 2026

Kasi Viswanathan V

1. HC Links "Available" ISD Credit to Section 16(2), Upholds Rule 39

When does input tax credit become "available" for distribution by an ISD? Is it the moment an invoice is received, or only after the statutory conditions governing eligibility of credit are satisfied?

The petitioner challenged Rule 39(1)(a) both in its earlier form and after its amendment with effect from 01.04.2025. The rule requires the ISD to distribute credit in the same month in which the input service invoice is issued by the supplier of service. This stipulation was questioned as being impossible, arbitrary and unreasonable. For the period prior to amendment, the challenge also proceeded on the ground that Section 20 of the CGST Act does not authorise the rule to prescribe the time within which credit must be distributed.

Revenue defended the rule along familiar lines. It was submitted that the rule was valid and that the amendment was only clarificatory. More significantly, it was argued that distribution of credit by an ISD is conceptually distinct from the "taking" or "availing" of input tax credit under Section 16. On that basis, the conditions in Section 16(2) and the timelines prescribed under Section 16(4) were said to have no relevance while examining the validity of the rule governing ISD distribution.

The Court examined the statutory scheme and noted that mere receipt of an invoice does not entitle a registered person to input tax credit. Entitlement arises only when the conditions specified in Section 16(2) are satisfied. The Court then focused on a key aspect: what is required to be distributed is "credit". Unless the conditions governing eligibility are fulfilled, the registered person cannot claim to be entitled to credit in the first place. Accordingly, the Court held that the credit available for distribution is the credit that becomes eligible in terms of Section 16(2) of the CGST Act.

In effect, the Court preferred a construction that preserves the rule while aligning it with the statutory scheme.

For taxpayers, the decision offers a form of partial relief. In an earlier decision of the Telangana High Court [2026-VIL-26-TEL] covered in previous edition (No. 270), the Court had granted complete relief for the pre-amendment period and, in the author's view, left open a possibility of challenge even for the amended regime.

One aspect of the Court's reasoning in the present case, however, raises an interesting point. The judgment also refers to the stipulation that the credit distributed should not exceed the credit "available" for distribution, and treats this as supporting the conclusion that the distributable amount is the credit eligible under Section 16(2) rather than the tax mentioned in the invoice. Historically, this concept is carried forward from the earlier regime where the purpose was simply to ensure that credit distributed does not exceed the tax paid in the invoice. The provision therefore appears to have been designed as a quantitative safeguard rather than as a mechanism to determine the point at which credit becomes legally distributable.

The logic of the judgment also leads to another question. Once eligibility under Section 16 forms the foundation of distributable credit, the timelines prescribed under Section 16(4) may also seek entry into the discussion, especially when purported legislative "objects" put forth by Revenue in para 6.1(c) did not meet the approval of the Court [Re: 2026-VIL-230-MAD].

2. Courts continue to be split on Negative Blocking of ITC

Courts continue to remain divided on the scope of negative blocking of input tax credit under Rule 86A. Interestingly, the word "available" once again becomes central to the discussion. The present case concerns whether credit must be "available for blocking" in the Electronic Credit Ledger (ECL) at the time of invocation of Rule 86A, or whether the power can extend to future credit (yet to be availed).

The P&H Court followed its earlier ruling in Shyam Sunder Strips [2025-VIL-1173-P&H] to hold that credit must be available in the ECL on the date of invocation of Rule 86A. On that basis, the Court set aside the amounts blocked in excess of the ITC actually available in the ledger.

At the same time, the Court reiterated that the provision is intended to meet emergent situations and therefore endorsed the view that a prior notice or show cause notice is not a pre-condition for invoking Rule 86A. Consistent with the approach adopted in similar cases, the authorities were left at liberty to pursue recovery by resorting to other remedies in accordance with law.

As noted in an earlier edition (No. 257), the issue continues to remain unsettled. While the present ruling reiterates that credit must exist in the ledger and that a pre-decisional hearing is not required for invoking Rule 86A, the Division Bench of the Karnataka High Court in K-9 Enterprises [2024-VIL-994-KAR] has taken a different view and held that a pre-decisional hearing is necessary. The final word on the scope of the power will likely await consideration by the Supreme Court. [Re: 2026-VIL-236-P&H]

3. RFD-01 Transmission Cannot Be Treated as Fresh Refund Application

When the GST Rules treats the shipping bill itself as the refund application for exports made on payment of IGST, a later system-driven transmission in terms of Rule 96(5A) to the jurisdictional officer raises an interesting question. Can such transmission be treated as filing of a fresh refund application for the purpose of limitation?

The dispute arose in the context of goods exported on payment of IGST in April 2021 under a shipping bill dated 15.04.2021. While filing GSTR-3B, the exporter had inadvertently disclosed the export turnover in Table 3.1(a) instead of Table 3.1(b). A mistake of this nature, familiar to many exporters navigating the early GST return formats, set the stage for the dispute. The issue was repeatedly brought to the attention of GSTN since 2022 and the related drawback issue was eventually resolved on 06.04.2024 after the technical glitch was addressed.

In the meantime, the exporter was categorised as a risky exporter. In terms of Rule 96(5A), the refund claim was transmitted from the Customs system (ICEGATE portal) to the jurisdictional GST officer (GSTN portal) on 23.04.2024. The rule provides that in such cases the refund application shall be deemed to have been filed on the date of transmission. Proceeding on this basis, the adjudicating authority treated the claim as time-barred.

In appeal, the appellant argued that under Rule 96(1) the shipping bill itself constitutes the refund application. The later transmission of the claim under Rule 96(5A), it was submitted, is only a continuation of that original application, the entire process being system driven and not involving any fresh act on the part of the exporter.

It was also pointed out that Rule 96(5A) does not use the expression "fresh application" (unlike Rule 90(3)). The deeming provision treating the refund as filed on the date of transmission was therefore argued to be limited in purpose, particularly in relation to the computation of interest under Sections 54(7) and 56, and not to reset the limitation period for filing the refund claim itself.

The appellate authority accepted the contention. Noting that there was no lapse on the part of the exporter, the authority held that the substantive right to refund could not be defeated on procedural grounds. The appeal was accordingly allowed.

The decision also brings into focus the structure of Rule 96. While Rule 96(1) treats the shipping bill as the application for refund of IGST paid on exports, the proviso postpones the filing date in situations where there is a mismatch until such mismatch is rectified. Rule 96(5A), on the other hand, operates at a later stage where the refund is withheld and the claim is transmitted to the jurisdictional officer. In that sense, the provision comes into play only after the refund claim already exists in the system.

Seen in this light, the deeming fiction in Rule 96(5A) treating the refund application as filed on the date of transmission does not appear to be in consonance with the scheme. [While the exporter in the present case argued that the same was relevant only for interest liability and not for determining limitation, so as to protect the refund claim itself]. The question of the relevant date for interest may resurface in a more direct challenge in an appropriate case [Re: 2026-VIL-01-GSTAA]

Read previous edition dated 09.03.2026

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)