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

How was ITC utilization allowed before Rule 86B?

Before Rule 86B was introduced,  Input Tax Credit  (ITC) could be utilized freely against the output tax liability. Businesses could use the available ITC balance to pay GST on their sales without any restrictions. There was no specific limit on how much ITC could be used in one go. This allowed businesses to offset their tax liability by using the full ITC available in their electronic credit ledger. The only condition was that the credit claimed was valid, i.e., it should match the invoices, and the supplier should have filed  GST returns . If these conditions were met, ITC could be used without restrictions.

Also Check-Out Insights on –  Transitioning To GST

How to calculate the turnover limit for Rule 86B

While checking whether the fifty lakh limit is crossed in a month, it is important to be clear about what to include and what to exclude.

You should include:

• Taxable outward supplies made within India that are liable to GST
• Supplies made to regular domestic customers, dealers and distributors

You should not include:

• Exempt supplies
• Zero rated supplies such as exports or supplies to special economic zone units without payment of tax
• Supplies which are completely outside the scope of GST

The calculation is done on the value of supplies, not on the tax amount.

Once you confirm that taxable outward supplies in a month are more than fifty lakh rupees, you then check whether you fall under any exception. If no exception is available, at least one percent of the output tax liability for that month must be paid in cash and the balance can be paid through input tax credit.

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.

Compliance checklist for businesses under Rule 86B

To avoid last minute issues while filing GSTR 3B, businesses can follow a simple month wise checklist.

Step one: Check taxable supplies for the month
Calculate the taxable value of outward supplies for the month, excluding exempt and zero rated supplies, and see whether it is more than fifty lakh rupees.

Step two: Compute output tax liability
Prepare a monthly summary of outward tax, taking into account all taxable supplies and any credit notes or debit notes.

Step three: Test Rule 86B applicability
If taxable supplies for the month are more than fifty lakh rupees, treat Rule 86B as applicable, subject to the exceptions. If they are below this limit, Rule 86B does not apply for that month.

Step four: Check if any exception is available
Review whether any of the following conditions are satisfied:

• Income tax of more than one lakh rupees has been paid in each of the last two years by the registered person or by key persons such as proprietor, karta, managing director or partner
• A refund of more than one lakh rupees was received in the previous year on account of exports or inverted duty structure
• Cumulative tax paid in cash in the current financial year already exceeds one percent of total output tax liability
• The registered person is a government department, public sector undertaking, local authority or statutory body

If any one of these conditions is met, the restriction under Rule 86B does not apply for that month.

Step five: Decide the minimum cash payment
If Rule 86B applies and no exception is available, calculate one percent of the output tax liability for that month. This is the minimum amount that must be paid in cash through the electronic cash ledger.

Step six: Maintain working papers
Keep a simple monthly working paper showing:

• Turnover used for the fifty lakh test
• Whether any exception applies
• How the one percent cash amount was computed

These records will help during audits and departmental enquiries.

How BUSY helps you stay compliant with Rule 86B

BUSY helps businesses stay on top of Rule 86B without extra manual work.

With BUSY you can:

• Track month wise taxable turnover separately from exempt and export turnover using flexible sales and GST reports
• View clear summaries of output tax liability and input tax credit for every tax period
• Reconcile GSTR 3B figures with the electronic credit ledger and cash ledger so you can see how much tax is being paid through ITC and how much in cash
• Plan cash flows better by knowing in advance when the one percent cash payment requirement is likely to apply
• Use audit trails and user wise logs to support your workings if the department asks for details

This way, BUSY does not only help you file accurate GST returns, it also gives you better control over cash outflow and compliance under Rule 86B.

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.