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What is the restriction imposed pursuant to Rule 86B on ITC?
Recently, the CBIC has inserted new Rule 86B in the CGST Rules, 2017. As per the new rule, the registered person has been restricted to use the amount available in the electronic credit ledger to discharge his liability towards output tax not more than 99% of such tax liability. This has been made applicable from 1-01-2021. Thus, it will impact the filing of GSTR-3B of December 2020 and months onwards.
GST rule 86B, 99% ITC restricted, 1% of Output liability to be paid in cash
Rule 86B restricts the use of the input tax credit (ITC) available in the electronic credit ledger for the discharge of the output tax liability. This rule has an overwhelming influence on all other CGST rules. Applicability: This rule applies to registered persons having a taxable supply value (other than exempt supply and zero-rated supply) in a month of more than Rs.50 lakh. The limit must be checked every month before each return is submitted.
The restriction imposed: the registered persons concerned cannot use ITC in excess of 99 percent of the output tax liability. Simply put, more than 99 percent of the output tax liability cannot be discharged by the use of the input tax credit
How input tax credit ITC use was allowed prior to Rule 86B
ITC plays a crucial role in GST by avoiding a cascading tax effect. There have been a lot of changes in the order of use of input tax credit for various components such as CGST, SGST, and IGST. However, the input tax credit available in the electronic credit report could always be fully utilized for the discharge of the output tax liability. New Rule 86B limited the use of the input tax credit balance for the payment of its output tax liability.
Exceptions: There are certain exceptions to this rule i.e. the rule shall not apply in the following cases;
- If the persons listed below have paid more than Rs.1 lakh as an income tax under the Income Tax Act, 1961
- The registered person: The proprietor, the Karta, or the MD of the registered person Any of the partners or full-time directors or any other person as the case may be. If the registered person concerned has received a refund of more than Rs.1 lakh in the preceding financial year on account of exports under LUT or on account of an inverted tax structure.
Notes: the said person or the proprietor or Karta or the managing director or any of its two partners, whole-time Directors, Members o/Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh.
3. If the registered person concerned has discharged his liability for output tax by electronic cash ledger for an amount exceeding 1 percent cumulatively of the total output tax liability up to that month in the current financial year.
4. If the registered person under concern is any of the following:
- Govt department
- PSU
- Local authority
- Statutory Authority
Implications of Rule 86B on biz and working capital
Having complied with the above constraints and exemptions presented by Rule 86B, it is completely obvious that the above-mentioned rule applies only to large taxpayers. There will be no impact on micro and small enterprises. The motto behind the emergence of this rule is to regulate the issue of counterfeit invoices for the use of counterfeit input tax credits to discharge the liability. Furthermore, it constrains fraudsters from having high turnover without financial credibility.
CBIC: 1% Cash Payment in accordance with rule 86B of the GST liability only affects 0.5% of taxpayers,
In clearing misconceptions in a series of tweets, CBIC said that the rule would only apply to 0.5% of the 1.2-crore total taxpayer base. CBIC has laid down in the GST Regulations Rule 86B, which is valid since 1 January 2021, restricting the utilization of GST liability inputs tax credit to 99%. The Board noted that previously there had been several objections raised to Rule 86B affecting a large number of taxpayers with regard to the compulsory 1 percent cash payment.
The CBIC said the new rule will help to control people issuing fake bills and showing high turnover, but without financial credibility. The Traders' body, CAIT, also urged the finance minister, Nirmala Sitharaman, to delay the application of Rule 86B in the GST and to call it a "counter-productive" measure to increase the traders' burden of compliance. The CBIC has claimed that approximately 12,000 cases of ITC have been booked and in such cases, 365 persons have been detained. More than 165 fraudsters were arrested during the last six weeks alone.
After Rule 86B has placed genuine taxpayers at bay as well, it is the government's motto that fake charges should be avoided and tax evasion should eventually be curbed.
