All About Rule 86B Under GST: Restriction on ITC Utilisation In Electronic Credit Ledger
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Exceptions to the Rule
Rule 86B allows certain exceptions, as mentioned below:
- 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.
- 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.
- 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.
- If the registered individual in question is any of the following:
- Government department
- Public sector initiative
- Local authority
- Statutory Authority
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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.
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.
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What is the restriction imposed under Rule 86B?
Rule 86B, introduced by the GST Council, imposes a restriction on the usage of ITC for taxpayers with a turnover of more than ₹5 crores in the preceding financial year. According to Rule 86B, such taxpayers cannot use more than 99% of their available ITC for tax payments. This means that at least 1% of the tax liability must be paid in cash, preventing businesses from completely relying on ITC. This rule was introduced to curb the misuse of ITC and ensure tax compliance, making businesses more accountable for utilizing ITC responsibly.
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.
Hi there! I’m a Chartered Accountant with over 20 years of experience in financial accounting and a passion for writing. I enjoy simplifying complex topics like GST and income tax, believing that learning should be a lifelong journey. I'm here to share insights and make financial matters easier for everyone!
Frequently Asked Questions
- Who is required to comply with Rule 86B under GST?Rule 86B applies to taxpayers with an annual turnover exceeding ₹5 crore in the preceding financial year. These taxpayers must comply with the restriction on the utilization of Input Tax Credit (ITC) for paying GST liabilities. It mainly targets larger businesses to ensure tax compliance.
- What is the primary objective of Rule 86B in the GST framework?The primary objective of Rule 86B is to prevent the misuse of ITC by large taxpayers. It ensures that businesses pay a portion of their tax liability in cash, thus promoting accountability, reducing tax evasion, and maintaining the integrity of the GST system.
- How does Rule 86B restrict the utilization of the input tax credit (ITC)?Under Rule 86B, taxpayers with turnover above ₹5 crore are restricted from using more than 99% of their ITC for settling GST liabilities. At least 1% of the total tax liability must be paid in cash, limiting over-reliance on ITC for tax payments.
- What are the monetary thresholds applicable under Rule 86B?Rule 86B applies to taxpayers whose turnover exceeded ₹5 crore in the preceding financial year. This threshold ensures that only larger taxpayers are subject to the rule’s restrictions on ITC utilization, which are aimed at preventing misuse by businesses with substantial turnover.
- Are there any exemptions to Rule 86B for certain taxpayers?Yes, Rule 86B has exemptions. Taxpayers who have paid tax in cash in excess of ₹1 lakh during the previous year or those who are engaged in the export of goods or services are exempt from the restriction imposed by Rule 86B.
- How does Rule 86B affect cash payment obligations for GST liabilities?Rule 86B mandates that taxpayers with turnover over ₹5 crore pay at least 1% of their GST liability in cash, even if they have enough ITC. This ensures that businesses cannot fully offset their liabilities using only ITC, promoting tax payments through cash.
- What percentage of GST liability must be paid in cash under Rule 86B?Under Rule 86B, taxpayers with turnover exceeding ₹5 crore must pay at least 1% of their GST liability in cash. This restriction ensures that businesses contribute to GST payments in cash, preventing over-dependence on ITC, and promotes a balanced tax payment system.
- Does Rule 86B apply to all taxpayers or specific categories of businesses?Rule 86B applies specifically to taxpayers with an annual turnover exceeding ₹5 crore in the preceding financial year. It is not applicable to all taxpayers, only to those with substantial turnover who are more likely to have significant ITC credits available for use.
- Can taxpayers offset the restriction of ITC utilization through other means?Taxpayers cannot completely offset the 1% cash payment requirement under Rule 86B by other means. However, they may be exempt if they meet specific conditions, such as paying taxes in cash in excess of ₹1 lakh in the previous year or dealing with exports.
- What are the consequences of non-compliance with Rule 86B?Non-compliance with Rule 86B can lead to penalties and interest. Suppose taxpayers fail to pay at least 1% of their GST liability in cash as required. In that case, they may face notices from tax authorities, leading to possible audits and further scrutiny under GST compliance regulations.
- How can businesses ensure compliance with Rule 86B under GST?Businesses can ensure compliance by monitoring their turnover and maintaining sufficient cash reserves to pay at least 1% of GST liability if required. They should also track ITC usage, ensure proper filing of returns, and stay updated on GST regulations to avoid penalties and stay compliant.
