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The Conundrum of Rule 86B in Indian GST Laws!

Abhishek Raja , Last updated: 14 May 2024  
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The Goods and Services Tax (GST) in India has been a subject of continuous evolution since its implementation. One such aspect that has been a cause for concern among taxpayers is the compliance with Rule 86B. This rule mandates a 1% payment of tax through the cash ledger, even when the credit ledger has a sufficient balance.

The Conundrum of Rule 86B in Indian GST Laws

The Rule and Its Implications

Rule 86B restricts the use of the amount available in the electronic credit ledger to discharge output tax liability in excess of 99% in cases where the value of taxable supply, excluding exempt and zero-rated supply, exceeds fifty lakh rupees in a month. This implies that at least 1% of the GST liability has to be paid in cash.

However, there are certain exceptions to this rule. For instance, it does not apply if the taxpayer or any of its key personnel have paid more than one lakh rupees as income tax in each of the last two financial years. Similarly, the rule is not applicable if 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. The rule also exempts government departments, public sector undertakings, local authorities, and statutory bodies.

The Challenges Faced by Small Businesses

The implementation of Rule 86B has posed significant challenges for small businesses. Despite the streamlining of GSTR1 through eInvoice and increased GSTR3B compliance due to the blocking of EWayBill, department officers are constantly seeking other areas for revenue generation. Rule 86B has emerged as a sure-shot area for this, primarily because many small businesses may not have adhered to it.

 

However, it’s not entirely the fault of these businesses. The GSTN portal itself lacks the necessary validations or provisions for making the mandatory 1% tax payment by cash ledger when a credit balance is available. Moreover, taxpayers are required to exhaust the IGST credit before they can utilize the CGST and SGST credits. They are also not allowed to partly pay by credit ledger and partly by cash ledger.

The Need for Better Infrastructure

When the notification for Rule 86B was issued, the government should have ensured that the GSTN portal was equipped to handle such transactions. Unfortunately, this was overlooked. As a result, the portal currently lacks the facility to enforce Rule 86B compliance, leading to questions from officers about why taxpayers have not followed the rule.

 

This situation has led to genuine concerns for taxpayers, who are caught in a predicament just because the government did not facilitate what they prescribed. Moreover, the officers are often unaware of the practical difficulties faced by the taxpayers.

In conclusion, while Rule 86B was introduced with the intention of curbing tax evasion, its implementation has been fraught with challenges. There is a pressing need for the government to equip the GSTN portal with the necessary features to facilitate compliance with this rule. Only then can the true potential of this rule be realized, ensuring a fair and efficient GST system for all.

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Published by

Abhishek Raja
(Practising CA)
Category GST   Report

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