Rule 86B: Analysis of Rule mandating the payment of GST in cash irrespective of availability of Input tax credit

Suyash Tripathi | Last updated: 07 May 2021

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Quick Summary

New GST Rule 86B, effective from January 1st, 2021, restricts businesses with a monthly taxable turnover exceeding Rs. 50 Lakh from using Input Tax Credit (ITC) to pay more than 99% of their output tax liability. This means at least 1% of the output tax must be paid in cash. The rule aims to combat fraudulent activities involving fake invoices and dummy registrations within the GST system. Certain entities, including government departments, PSUs, and businesses with significant income tax payments or refunds for unutilised ITC, are exempt.

The Central Board of Indirect Taxes and Customs (CBIC) has introduced new rule 86B in Goods and Services Tax (GST) which restricts use of input tax credit for discharging liability to 99 percent. The Rule is effective from 01st January,2021.

Analysis of new rules

Rule 86B has an overriding impact on any other provision of rules as it starts with the non-obstante clause. It provides a restriction on the use of ITC while discharging output liability by restricting the use of amount available in the electronic credit ledger to discharge liability towards output tax.
Output tax liability cannot be discharged in excess of 99% by utilizing Input tax credit i.e 01% of Output tax liability shall be discharged in cash.
This rule is applicable to Business having a monthly taxable turnover above Rs.50 Lakh. For the purpose of calculation of taxable turnover, sale from GST exempt goods and zero rated supply would not be included.

Example

M/s ABC has a turnover of Rs.5 Crores in a previous financial year. For the month of January 2020, Export Turnover is Rs. 65 Lakh, Exempted Turnover is Rs. 72 Lakh and Taxable Turnover is Rs.35 Lakh. Since the Taxable turnover is less than Rs.50 Lakh, Rule 86B will not be applicable.

Non Applicability of Rules

Where 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 Rs 1 lakh as income tax in each of the last two financial years for which the time limit to file return of income under section 139(1) has expired; or
Where registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit due to zero-rated supplies made without payment of tax.
Where the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under Inverted duty structure.
where 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.
the registered person is Government Department; or a Public Sector Undertaking; or a local authority; or a statutory body:

The notified measures would help tackle menace of fake invoices for availing and passing on of input tax credit (ITC) by fraudsters.

Collectively these steps are likely to control dummy registrations and fake billing for ITC to take GST process towards a cleaner and robust regime

The author can also be reached atTripathi.r.suyash@gmail.com

FAQ :

GST Rule 86B is a new regulation introduced by the CBIC that limits the use of Input Tax Credit (ITC) to discharge output tax liability to 99%, requiring at least 1% to be paid in cash.

Rule 86B became effective from 1st January 2021.

The rule applies to businesses with a monthly taxable turnover exceeding Rs. 50 Lakh. Sales of GST-exempt goods and zero-rated supplies are not included in this turnover calculation.

The rule is designed to tackle the menace of fake invoices and fraudulent availment or passing on of Input Tax Credit (ITC), thereby promoting a cleaner and more robust GST regime.

Yes, exemptions include government departments, public sector undertakings, local authorities, statutory bodies, and businesses that have paid over Rs. 1 lakh in income tax for the last two financial years, or received significant refunds for unutilised ITC.