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.
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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?Businesses with monthly taxable supplies exceeding ₹50 lakh must follow Rule 86B. It restricts using more than 99% of the input tax credit (ITC) for GST payment, requiring at least 1% of the liability to be paid in cash.
- What is the primary objective of Rule 86B in the GST framework?The main goal of Rule 86B is to prevent fake ITC claims and tax evasion. It ensures businesses pay some tax in cash to maintain transparency and encourage genuine compliance with GST rules.
