Rule 86B of GST: ITC Utilization Restrictions & Exceptions

Key Points on Rule 86B of GST

Rule 86B of GST (Goods and Services Tax) in India imposes specific restrictions on the utilization of Input Tax Credit (ITC) for registered persons whose monthly taxable supplies exceed INR 50 lakh. Below are the detailed provisions and implications of this rule:

Extract of Rule 86B of GST

Rule 86B of GST. Restrictions on use of amount available in electronic credit ledger.-

Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where -

• (a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or
• (b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or
• (c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or
• (d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or
• (e) the registered person is -
  • (i) Government Department; or
  • (ii) a Public Sector Undertaking; or
  • (iii)a local authority; or
  • (iv) a statutory body:

Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.

Key Provisions of Rule 86B:

1.  Limit on ITC Utilization:

• Registered persons whose aggregate turnover exceeds INR 50 lakh in a month are restricted from utilising more than 99% of their output tax liability from the electronic credit ledger.
• This means that at least 1% of the output tax liability must be paid in cash.

2.  Exceptions:

   Rule 86B of GST does not apply in the following cases:

• If the registered person or any of the key individuals associated with the business (like partners, directors, etc.) have paid more than INR 1 lakh in income tax in each of the last two financial years.
• If the registered person has received a refund of more than INR 1 lakh in the preceding financial year due to exports or an inverted duty structure.
• If the registered person has cumulatively paid more than 1% of their total output tax liability in cash during the current financial year.
• If the registered person belongs to specific categories such as government departments, public sector undertakings, local authorities, or statutory bodies.

3.  Overriding Effect:

• Rule 86B has an overriding effect on other rules under the CGST Rules, meaning it takes precedence over them.

4.  Commissioner's Authority:

• The Commissioner or an authorized officer has the authority to remove the restrictions imposed by this rule after conducting appropriate verification and implementing necessary safeguards.

5.  Legal Backing:

• The introduction of Rule 86B is supported by Section 49(12) of the CGST Act, which allows the government to specify the maximum proportion of output tax liability that can be discharged through the electronic credit ledger.

Purpose and Implications:

Combatting Tax Evasion:

The primary aim of Rule 86B is to combat tax evasion, particularly related to fake invoicing and the misuse of input tax credit.

Cash Flow Impact: 

Due to the mandatory cash payment requirement, businesses may experience cash flow impacts, which could affect their operational liquidity.

Compliance Obligations:

Businesses must comply with this rule to avoid penalties and maintain their eligibility for ITC.

Competitive Advantage:

Certain entities that qualify for exemptions may have a competitive advantage over others.

Conclusion:

Overall, Rule 86B is a significant measure to enhance tax compliance and reduce fraudulent activities within the GST framework. It is essential for businesses to understand and comply with these provisions to ensure smooth operations and avoid any legal repercussions.