All About Rule 86B Under GST: Restriction on ITC Utilisation In Electronic Credit Ledger

Exceptions to the Rule

Rule 86B allows certain exceptions, as mentioned below:

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

• The registered person 
• Proprietor, Managing Director, or Karta of the Registered Person
• Any partners, full-time directors, or any other individual as the case may be.

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 output tax liability through an electronic cash ledger that cumulatively exceeds 1% of the outstanding output tax liabilities up to the relevant month in the current fiscal year.
4. If the registered individual in question is any of the following:

• Government department
• Public sector initiative
• Local authority
• Statutory Authority

Effect of Rule 86B on Firms and Working Capital

After examining Rule 86B, it is clear that the above rule only applies to large taxpayers. Small and micro businesses are not affected by this rule.

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.

Further clarification from the CBIC states 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.

Conclusion

Rule 86B has been introduced to stop fake claims for input tax credit. The rule affects only large taxpayers who have minimum taxable supplies of Rs. 50 lakhs in a month. Yes, this rule will also affect the large taxpayers who legitimately pay their tax dues, making it a little difficult for them, but the Government’s ultimate goal is to prevent fake invoices and eventually stop tax evasion.