Rule 86B: Restriction on use of ITC available in credit ledger- A detailed analysis
Introduction:
The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new Rule 86B vide Notification No. 94/2020 dated 22/12/2020 restricting the use of ITC available in electronic credit ledger towards payment of output tax to the extent of 99%. This means that 1% of output tax liability shall be paid in cash. This rule has been made effective from 01st January, 2021.
This restriction is applicable on those taxpayers whose value of taxable supply (other than exempt supply & zero-rated supply), in a month is more than Rs. 50 Lakhs. The newly inserted Rule 86B has the effect that the ITC available in the electronic credit ledger cannot be fully utilized and will thus unnecessarily block the working capital of the business.
How was ITC utilised before Rule 86B
Before insertion of Rule 86B, the balance of input tax credit available in the electronic credit ledger could be fully utilised by the taxpayer for payment of output tax liability. It helped in avoiding the cascading effect of tax.
EFFECT OF INSERTION OF RULE 86B
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Rule-86B reads as follows: “Restrictions on use of amount available in electronic credit ledger: Notwithstanding anything contained in these rules, the registered person shall not use the amount available in the electronic credit ledger to discharge his liability towards output tax in excess of 99% of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply in a month exceeds Rs. 50 Lakhs.” |
What is the applicability date of Rule 86B
Rule 86B starts with a non-obstante clause “Notwithstanding anything contained in these rules”. It means that it overrides all other GST rules from the date of its applicability i.e. 1st January, 2021.
When is Rule 86B applicable to the taxpayer
- Rule 86B is applicable to those registered persons who are having a turnover from taxable supply of goods or services or both in a month exceeding Rs. 50 Lakhs.
- The calculation of turnover threshold shall be made for each month before filing of GST return.
- Taxable turnover shall not include turnover related to exempt supply or zero-rated supply.
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Taxable Turnover = Total Turnover- Exempt & Zero-Rated turnover |
What is the restriction imposed by Rule 86B on ITC utilization
- Rule 86B limits the use of ITC available in the electronic credit ledger for the payment of output tax liability.
- In case, the turnover of a registered person is more than Rs. 50 Lakhs in a particular month, then only 99% of the output tax liability can be discharged through ITC available in electronic credit ledger.
- 1% of the output tax liability shall be required to be paid in cash.
In which cases Rule 86B is not applicable
Proviso to Rule 86B provides the cases where restriction on utilisation of ITC available in electronic credit ledger shall not be applicable. If the taxpayer falls in any one of these cases, Rule 86B shall not apply:
(a) If any of the persons mentioned below have paid income tax more than Rs. 1 Lakh in each of the two financial years for which the due date of filing ITR has expired:
- The said registered person or
- Proprietor
- Karta (in case of HUF)
- Managing Director or whole-time director (in case of company)
- Any of the partners (in case of firm)
- Members of Board of Trustees or
(b) Where the registered person has received a refund of an amount more than Rs. 1 Lakh in the preceding financial year on account of unutilised ITC in case of:
- Zero-rated supplies without payment of tax (Export under LUT)
- Credit accumulated on account of higher rate of tax on inputs as compared to rate of tax on output (Inverted tax structure) or
(c) If the registered person has paid output tax liability through electronic cash ledger for an amount in excess of 1% cumulatively up to the said month in the current financial year or
(d) If the registered person is any of the following:
- Government Department
- Public Sector Undertaking
- Local Authority
- Statutory Authority
Author’s Note:
Rule 86B has been introduced with an intention to curb the instances of tax evasion by way of fake invoices. However, the entire business community cannot be led to suffer due to mischiefs of few persons. This rule will certainly affect those businessmen who works on a really low margin due to industrial practice or being new in the trade and wants to penetrate in market by keeping margins low. Further, Rule 86B is a direct attack on the very soul of the GST law which at the time of its inception has promised “seamless flow of credit”.
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