Restricting use of ITC amount for discharging output tax liability in GST

The CBIC vide Notification No. 94/2020-Central Tax, dated December 22, 2020, has introduced a new Rule 86B in the Central Goods and Services Rules, 2017 ("CGST Rules") in the following manner:

• Introduced new Rule 86B, restricts the use of Input Tax Credit ("ITC") for discharging the output tax liability, applicable on the registered person whose value of taxable supply other than exempt supply and export, in a month exceeds fifty lakh rupees.

• The taxpayer is not allowed to use ITC in excess of 99% of output tax liability.

• The said Rule is not applicable in the following cases:-

. If the registered 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 has paid more than INR 1 lakh as income tax under the Income-tax Act, 1961 in each of the last two financial years.

a. If the registered person has received a refund amount of more than INR 1 lakh in the preceding financial year on account of export under LUT/ Bondor inverted tax structure i.e., rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.

b. If 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, up to the said month in the current financial year.

c. If the registered person is the Government Department, Public Sector Undertaking, Local Authority or Statutory Body.

Rule 86B effective from January 1, 2021 reads as under

"86B. 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 a 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 subsection (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, up to 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."

The Notification can be accessed here

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