Understanding Rule 86B of CGST Rules: Restrictions on ITC Utilization



Quick Summary
CGST Rule 86B, effective from January 1st, 2021, restricts the use of Input Tax Credit (ITC) for businesses whose taxable supplies exceed Rs. 50 lakh per month. These businesses must now pay at least 1% of their output tax liability in cash, aiming to combat fake invoicing and tax evasion. While most businesses above this threshold are affected, there are specific exceptions for those with high income tax payments, significant refunds, or those meeting certain cumulative cash payment criteria, as well as statutory bodies.

The Central Goods and Service Tax (CGST) Act introduced Rule 86B vide Notification number 94/2020 dated 22nd December, 2020. Rule 86B is made effective from 1st January 2021 curb the menace of fake invoicing and tax evasion. This rule restricts the use of Input Tax Credit (ITC) available in the electronic credit ledger for discharging the output tax liability. Let's delve deeper into the nitty-gritty of Rule 86B.

Applicability of Rule 86B

This rule applies to registered businesses under the GST regime whose taxable value of supplies (excluding exempt and zero-rated supplies) exceeds Rs. 50 lakh in a particular month. It's crucial to assess the taxable turnover every month before filing GST returns to determine applicability.

CGST Rule 86B: Limit ITC Use Over Rs 50 Lakh Turnover

Restrictions Imposed

Rule 86B mandates that applicable registered persons cannot utilize ITC exceeding 99% of their total output tax liability. In simpler terms, businesses with a monthly taxable turnover above Rs. 50 lakh are required to pay at least 1% of their output tax liability in cash. This 1% cash payment effectively restricts the usage of ITC accumulated through purchases.

Objectives of Rule 86B

The primary objective behind this rule is to curb the creation of fake invoices for claiming fraudulent ITC. By mandating a minimum cash payment for output tax liability, the government aims to discourage the generation of fictitious invoices to inflate ITC and evade taxes.

 

Exceptions to the Rule

While Rule 86B applies to most businesses exceeding the Rs. 50 lakh turnover threshold, certain exceptions exist. These exceptions include:

  • Businesses paying high income tax: If a registered person or the proprietor/karta/managing director/partners have paid income tax exceeding Rs. 1 lakh in each of the preceding two financial years, they are exempt from the rule.
  • Businesses receiving a refund: If the registered person under concern has received a refund of amount greater than Rs.1 lakh in the preceding financial year on account of export under LUT or due to inverted tax structure
  • Paid Output Tax in Excess of 1% Cumulatively: If the registered person under concern has discharged his liability towards output tax by electronic cash ledger for an amount in excess of 1% cumulatively of the total output tax liability up to the said month in the current financial year.
  • Statutory bodies: Government bodies i.e. Government department, Public sector undertaking, Local authority and Statutory Authority are not subject to the restrictions imposed by Rule 86B.
  • Discretion of Commissioner: The Commissioner or authorized officials can, at their discretion and after due verification, remove the restriction on a case-by-case basis.
 

Impact of Rule 86B

This rule primarily impacts large businesses with high turnovers. Small businesses with a monthly taxable turnover below Rs. 50 lakh are not affected by the restrictions on ITC utilization. While the rule might increase the cash outflow for some large businesses, it plays a vital role in plugging loopholes and ensuring a more robust and transparent tax system.

Conclusion

Rule 86B of the CGST Act serves as a significant measure to curb tax evasion and promote a fair tax environment. By understanding its applicability, restrictions, and exceptions, businesses can ensure compliance and avoid any potential penalties. It's advisable to consult a tax advisor for specific guidance regarding Rule 86B and its implications for your business.

Disclaimer: We request readers to seek professional advice before arriving at any decision/conclusion after reading. We are not responsible for any loss arising to anyone after referring and relying on this article. Above views are based on our understanding of the provisions

The author can be reached at office.bhavikco@gmail.com


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About the Author

Practice

Greetings to Everyone, I am Bhavik Hansa Prakash Chudasama, a Practicing Chartered Accountant based in Thane, Maharashtra, and the proprietor ofBhavik Chudasama Co., Chartered Accountants. With over a decade of experience in the industry since 2009, I specialize in the following areas: Taxation: VAT, Income Tax Re ... Read more

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