All about Rule 86B under GST: Restriction on ITC Utilisation in Electronic Credit Ledger

Abhishek Kumar

30 May, 2024

Vide notification No. 94/2020, dated 22^nd December 2020, the CBIC introduced Rule 86B, which imposed a 99% restriction on ITC available in the Electronic Credit Ledger of a registered person. It means that 1% of output liability will be paid in cash. The limitation applies where the value of taxable supply except exempt supply and zero-rated supply in a month exceeds INR 50 lakh. The objective behind this provision is to curb fake invoicing by requiring him to pay tax in cash. The CBIC is empowered under section 164 of the CGST Act 2017 to release this new rule 86B to the CGST Rules, 2017, through a notification. Once the ITC is availed under Section 16, it is credited to the registered person’s Electronic Credit Ledger maintained under Rule 86. It can be utilized for payment towards output tax, as Section 49 of the CGST Act 2017 provides. This is further subject to restrictions mentioned in Rule 86A and 86B.

Rule 86B overrides all other CGST Rules. The rule starts with a non-obstante clause and has an overriding impact on any other provisions of the regulations. If a registered person supplies taxable supply in a month exceeding INR 50 lakh, then 1% of such tax liability shall be paid in cash.

What are the restrictions imposed under Rule 86B?

It is the taxpayer’s responsibility to collect tax from the recipient of the supply. It should be remitted to the exchequer after deducting tax paid by him as a recipient for the supplies he received in his account. However, there are various restrictions to the utilization of the tax paid by the taxpayer while discharging his output tax liability. He can utilize the ITC only when the same is finally remitted to the Government by the Supplier.

As per Rule 86B, the input tax credit (ITC) available in the electronic credit ledger (ECL) is limited to discharging the output tax liability. This rule overrides all other CGST Rules. The rule applies to registered persons with a monthly taxable supply value above INR 50 lakh. Exempt supply and zero-rated supplies are exempt. The limit has to be looked upon every month before filing each return. The applicable registered persons should not use ITC over 99% of the output tax liability. In other words, greater than 99% of the output tax liability cannot be discharged by using an input tax credit.

Exceptions to the Rule:

i. Where the person mentioned below has paid more than INR 1 lakh as Income Tax under the Income Tax Act 1961:-

• The registered person

• The Proprietor, karta or Managing Director of the Registered person

• Any partners, whole-time directors, or any other person, as the case may be. 

ii. Where the registered person under concern has received a refund of an amount greater than INR 1 lakh in the preceding fiscal year on account of export under Letter of Undertaking (LUT) or due to an inverted tax structure. 

iii. Where the registered person concerned has discharged his output tax liability by electronic cash ledger for an amount over 1% in aggregate of the total output tax liability up to the said month in the current fiscal year. 

iv. If the registered person concerned is any of the following:

• Government Department

• Public Sector Undertaking

• Local Authority

• Statutory Authority

This rule shall not apply to companies paying more than INR 1 lakh in the preceding two financial years because it is presumed that fake companies do not pay income tax greater than INR 1 lakh in the previous two financial years. However, an income tax of INR 1 lakh would not be a big deal for a company dealing in crores.

Impact of Rule 86B on businesses and working capital

After looking at the restrictions and exceptions imposed by Rule 86B, it is clear that this rule applies only to large taxpayers. There is no impact on micro and small businesses. This rule was introduced to control the issue of fake invoices to use the fake input tax credit to discharge liability. Further, it also restricts fraudsters from showing high turnovers without having any financial credibility. CBIC ¹ has clarified that 1% will be calculated on the tax liability in a month with the turnover of the respective month.

Cancellation of GST Registration

As per rule 21(g), if there is any violation of provisions of rule 86B, the registration granted to a person will be cancelled.

Conclusion

This rule was introduced to prevent fake companies from paying income tax as it applies to all persons with a taxable supply value in excess of INR 50 lakh. The rule restricts registered persons to use ITC above 99% of the output tax liability. However, it has also excluded specified persons from its purview.

Read our Article: All you need to know about CGST Rule 86A on ITC

FAQs

1. https://www.cbic.gov.in/