Everything you need to know about GST Rule 86B: Limitations on ITC Utilisation in Electronic Credit Ledger.

The Central Board of Indirect Taxes and Customs (CBIC) published notification number 94/2020 on December 22, 2020, introducing new regulation 86B. Rule 86B became operative beginning January 1, 2021.

Before Rule 86B, how was ITC utilisation permitted?

The input tax credit is crucial to the GST since it prevents the cascading effect of taxation. The order in which ITC is applied to various components, including CGST, SGST, and IGST, has undergone numerous modifications. However, the output tax burden might continuously be discharged in full using the ITC in the electronic credit ledger. The new Rule 86B has restricted the use of the ITC balance for paying the output tax liability.

What limitation does Rule 86B impose?

Rule 86B restricts how input tax credit (ITC) from the electronic credit ledger can be used to offset the output tax liability. All other CGST Rules are superseded in effect by this rule.

Application: This rule applies to registered persons with taxable supply values of more than Rs. 50 lakh in a month (other than exempt and zero-rated supplies). Before submitting each return, the limit must be verified every month.

The applicable registered persons are prohibited from using ITC for more than 99% of their output tax liabilities. Simply put, an input tax credit cannot be used to offset an output tax liability exceeding 99%.

Exceptions to the Rule

1. If the individuals listed below paid more than Rs. 1 lakh in income tax pursuant to the 1961 Income Tax Act,

   • The registered person 

   • Proprietor, Managing Director, or Karta of the Registered Person

   • As the situation demands, any of the partners, full-time directors, or any other individual.

2. If the registered person has previously obtained a refund for export under LUT or because of an inverted tax structure totalling more than Rs. 1 lakh.

3. If the registered person in question has paid all of his production tax liabilities through an electronic cash ledger that exceeds 1% cumulatively of the outstanding output tax liabilities through the relevant month in the current fiscal year.

4. If any of the following apply to the registered individual in question:

   • Government department

   • Public sector initiative

   • Local authority

   • Statutory Authority

Rule 86B's effects on firms and working capital

It is obvious that the above rule only applies to large taxpayers after reviewing the restrictions and exceptions imposed by Rule 86B. Small and micro businesses won't be affected.

The aim of implementing this rule is to prevent the issuance of fake invoices that claim fraudulent input tax credits to discharge liabilities. It also prevents scammers from claiming high turnovers when they have none.

CBIC has further emphasised that 1% is to be computed on the tax liability in a month and the turnover of the particular month.

Illustration

Let's use the following example to understand it better:

A taxpayer named Mr A sold products for Rs. 1 crore at a 12% tax rate. According to this rule, he can fulfil his obligation in this situation up to 99% through ITC and pay Rs. 12,000 in cash.

Although this rule also affects legitimate taxpayers, making it difficult for them, the government's goal is to prevent fake invoices and eventually stop tax evasion.