CA Puspendra Jain
The implementation of Rule 86B within India's Goods and Services Tax (GST) framework, which aims to curtail fraudulent input tax credit (ITC) claims by necessitating certain taxpayers to remit 1% of their output tax liability in cash, has faced scrutiny due to its potentially detrimental effects on the financial stability of small and medium-sized enterprises. Rule 86B of the Goods and Services Tax (GST) in India imposes restrictions on the utilization of input tax credit (ITC) for certain taxpayers.
What the exact rule say:
Notwithstanding anything contained in these rules, the registered person shall not use the amount available in the 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:
after this government provided some exceptions that is
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.]
This rule stipulates that if a registered person's value of taxable supplies, other than exempt and zero-rated supplies, in a month exceeds ₹50 lakh, they can only use 99% of their available ITC to settle output tax liability. The remaining 1% must be paid using cash or through the electronic cash ledger. This measure aims to curb fraudulent ITC claims and ensure a minimum cash payment of taxes. However, the rule provides exemptions for specific categories of taxpayers, including those who have paid income tax exceeding ₹1 lakh in the preceding two financial years, government departments, and public sector undertakings. Rule 86B has been a subject of debate due to its potential impact on business cash flows, particularly for small and medium enterprises.
Although from the insertion of this rule, the government has not changed from 1% to more & Below the 50 Lakh but the same can be changed by this government at any time.
My suggestion is never to take 100% ITC in any year.
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