RULE 86-B under GST Act- Restriction on Utilisation of ITC

Rule 86B in Goods and Services Tax (GST) has been introduced by The Central Board of Indirect Taxes and Customs which restricts use of input tax credit for discharging liability to 99%. This Rule is effective from 01st January, 2021.

It put the restriction on utilization of input tax credit.  After the introduction of Rule 86B, it has limited the use of ITC balance for paying its output tax liability. CBIC further clarified that 1% is to be calculated on the tax liability in a month and the turnover of the respective month.

How was ITC utilization allowed earlier before Rule 86-B:

Input tax credit (ITC) always plays a very important role in GST by avoiding cascading effect of taxation. Since the introduction of GST, the utilisation of ITC for different components such as CGST, SGST and IGST has gone through a lot of changes. However, the ITC standing in the electronic credit ledger could always be fully utilised for discharging the output tax liability.

Applicability:

Rule 86-B is applicable to those registered persons who have taxable value of supply (other than exempt supply and zero-rated supply) in a month exceeding Rs.50 lakh. The limit of Rs. 50 lakhs has to be checked every month before filing each return. This is not relevant to last year sales or any previous year sales it’s only about particular month sales that’s it.

Example:

Total turnover – Rs 1,00,00,000  ,
Exempt supply – Rs 15,00,000,
Zero rated supply – Rs 500000

So Taxable turnover -Rs 80,00,000

Now tax liability is 18%on Rs 80,00,000 taxable turnover

So tax liability amount to Rs. 14,40,000

Since the turnover exceeds the limit of Rs. 50 lakh ,therefore rule 86B is applicable . So minimum  1% of Rs. 14,40,000 (i.e Rs 1440) is payable through cash ledger irrespective of the amount available in credit ledger and rest 99%of Rs 14,40,000 (i.e rs 1,42,560) can be paid  through the use of credit ledger.

Exemption available:

• If registered person, proprietor ,Karta, managing director of registered person ,any of the partner or whole time directors or any other person as per the case have paid more than 1 lakh income tax under Income Tax(also includes advance tax and TDS) act ,1961
• If the registered person under concern has received a refund of amount greater than Rs.1 lakh in the preceding financial year on account of export as a unutilised input tax credit under 1st proviso and 2nd proviso of sub section 3 of section 54 if CGST ACT
• If the registered person under concern discharged his liability towards output tax by electronic cash ledger for an amount in excess of 1%of cumulative of total output tax liability upto the said month in current financial year .
• And at the discretion of the registered person under concern is any of following
  • Government Department
  • Public sector undertaking
  • Local authorities
  • Statutory authority

Conclusion :

This proviso gives an impact on business and working capital .Rule 86B effects only large taxpayers and there is no impact on micro and small businesses .The motive behind this rule 86-B is that the CBIC is trying to control the issue of fake invoices to use the fake input tax credit for discharging liability. Also by this they are trying to stop the fraudsters from showing high turnover without having any financial credibility.