The indirect tax department has started blocking input tax credit of the whole supply chain under the GST framework if even one of the vendors or suppliers has missed out filing requirements, impacting several corporates, and prompting some to consider legal recourse.

The tax department is claiming that there could be circular trading or other frauds in many of these cases as tax credits are not tallying, but legal experts say blanket rejection of tax credit will lead to litigations and increase cash flow issues of companies.

Many companies claim that few small suppliers and vendors are unable to fill details or comply with the tax credit rules due to Covid-19. And tax sleuths are blocking tax credit for whole supply chain.

Companies are now looking to drag the taxman to court.

“Rule 86A should be invoked only in rare cases on a very strong reason to believe that the transactions of purchase are not genuine and to protect revenue in case of fly by night operators,” said Abhishek A Rastogi, partner at law firm Khaitan & Co. The rule gives powers to the tax department to block input tax credit if it suspects that the credit is availed fraudulently. In the last few weeks, some of the largest companies in automobile, real estate, infrastructure, and manufacturing sectors have started receiving show-cause notices in this regard.


Input tax credit is basically goods and service tax (GST) paid on raw materials or procurements that can be set off against future tax liability of a certain kind.

As per the GST framework, a company cannot claim the credit till the time the supplier has paid GST and uploaded the necessary documents to that effect. During the pandemic, the government had given some leeway in the time frame by which companies are required to file the GST returns.


Industry trackers attribute the tax department’s reluctance to release input tax credits to what happened last year when it unearthed a number of frauds.

After investigating several instances across the country, the department had then found that many companies were indulging in circular trading and taking fake input tax credit. Many companies were found to be manipulating the system through circular trading or by merely showing the movement of goods from one company in one state to another.


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