NGTP Flag and Dual Proceedings: Protecting Bona Fide GST Recipients From Mechanical Action

1. Background: How a Risk Tag Became a Proxy for Guilt

The NGTP (Non-Genuine Taxpayer) tag was designed as an internal risk indicator within the GST ecosystem. In theory, it is simply a “red flag” prompting deeper verification of a supplier. In practice, however, it is increasingly being treated as conclusive proof of wrongdoing against every assessee who has purchased from such a tagged supplier.

Across field formations, especially in Karnataka, NGTP tagging is frequently being used as a ready-made justification for:

  • Blocking input tax credit (ITC) under Rule 86A
  • Issuing DRC-01A intimations under Section 74(5)
  • Threatening adverse consequences flowing from retrospective cancellation under Section 29(2)
  • Initiating overlapping or duplicate proceedings by different officers for the same set of transactions

This approach is problematic on several levels:

  1. The supplier’s GSTIN often remains active on the portal during the relevant period.
  2. The supplier continues regular business and files GSTR-1 and GSTR-3B.
  3. The assessee’s GSTR-2B clearly shows the ITC based on those very invoices.
  4. No concrete field material is disclosed to the assessee to justify the NGTP conclusion.

The result: bona fide recipients become soft targets, while the alleged defaulting supplier frequently remains untouched or is proceeded against only on paper.

2. On-Ground Pattern in Karnataka: Mechanical Notices and Wrong Quantification

2.1 The “information chain” and blind reliance

A standard pattern has emerged:

  1. Internal intelligence or NGTP information is generated at a higher level (often attributed to an Additional Commissioner).
  2. This flows downstream to the Joint Commissioner.
  3. It is then forwarded to the Local GST Office (LGSTO) or Audit wing.
  4. Finally, a notice is issued to the assessee, treating the NGTP flag as if it were a fully proved fact.

By the time the notice reaches the assessee, fundamental errors are often visible on the face of the document.

2.2 Example of glaring computational error

In one case, an assessee received a notice proposing Rule 86A action where:

  • Taxable turnover cited: ₹11,86,080
  • Tax rate assumed: 18%
  • Correct tax should be: ₹2,13,494
  • Tax quantified in notice: ₹21,66,054

Such a huge mismatch is not a marginal slip. It reflects complete lack of independent verification by the issuing authority. Yet, the notice carries all the legal force and immediate consequences of a properly vetted official communication.

Note: When quantification itself is absurd, any claim of “formed belief” under Rule 86A or “fraud” under Section 74 becomes suspect and challengeable.

3. Rule 86A: Preventive Tool, Not an Automatic Weapon

Rule 86A empowers the Commissioner, or an authorised officer not below the rank of Assistant Commissioner, to restrict utilisation of ITC in the electronic credit ledger if he has reasons to believe, based on tangible material, that the credit:

  • Has been fraudulently availed, or
  • Is otherwise ineligible,

in situations such as:

  • Invoice issued by a registered person found to be non-existent or not conducting business from the declared place
  • Invoice without actual receipt of goods/services
  • Tax charged in invoice not paid to the Government
  • Person availing ITC being non-existent
  • Credit availed without valid documents

Key statutory safeguards built into Rule 86A:

  • Reasons must be recorded in writing
  • Power is person-specific and transaction-specific
  • Restriction is temporary, automatically lapsing after one year from the date of imposition unless lifted earlier

Therefore, Rule 86A is preventive and exceptional, meant for serious, well-founded cases—not a routine tool triggered merely because a supplier is flagged NGTP somewhere in the system.

3.2 Karnataka High Court view: Rule 86A is assessee-specific

In M/s Sri Padmavathi Marketing v. The Assistant Commissioner of Commercial Taxes, LGSTO, Bengaluru (dated 04.03.2026), the Karnataka High Court clarified that:

  • Rule 86A can be invoked only where the assessee whose ledger is blocked has itself fraudulently availed or is holding ineligible ITC.
  • Even if a recipient has wrongly availed ITC, Rule 86A can apply only against that recipient, not against some other taxable person in the chain merely because it issued invoices.

The Court held the show cause notice improper and without jurisdiction and directed unblocking of the electronic credit ledger.

Key implication: Rule 86A demands legal discipline and clear nexus between the blocked ITC and the assessee’s own alleged fraud or ineligibility. A generic NGTP label on some other party is not enough.

4. The Contradiction of “Non-Existing” but Still Active Suppliers

4.1 Active registrations versus non-existent allegations

A recurring anomaly in NGTP-based notices is this: