The implementation of the Goods and Services Tax (GST) in India has revolutionized the tax system, simplifying the process and eliminating the cascading effect of taxation. One of the key components of GST is the input tax credit (ITC), which allows businesses to claim a credit for the tax paid on their purchases against their output tax liability. However, to ensure the integrity of the system and prevent misuse, the Central Board of Indirect Taxes and Customs (CBIC) has introduced Rule 86B, which imposes certain restrictions on the utilization of ITC. In this article, we will delve into the details of Rule 86B and its implications for businesses.
Rule 86B, introduced by the CBIC through a notification dated 22nd December 2020, became effective from 1st January 2021. This rule aims to curb the misuse of ITC and prevent tax evasion. It imposes restrictions on the utilization of ITC available in the electronic credit ledger for discharging the output tax liability. The rule applies to registered persons whose taxable value of supply (excluding exempt and zero-rated supplies) in a month exceeds Rs. 50 lakh.
Rule 86B is applicable to registered persons meeting the following criteria:
Under Rule 86B, registered persons meeting the above criteria are restricted from utilizing ITC in excess of 99% of their output tax liability. In simpler terms, they cannot use more than 99% of the available ITC to discharge their tax liability. The restriction applies to the total output tax liability, including central goods and services tax (CGST), state goods and services tax (SGST), integrated goods and services tax (IGST), and cess.
While Rule 86B imposes restrictions on ITC utilization, certain exceptions have been provided to prevent genuine taxpayers from being unduly burdened. The following are the exceptions to Rule 86B:
The introduction of Rule 86B has had a significant impact on businesses, particularly medium and large taxpayers. The restriction on ITC utilization affects their working capital management and cash flow. By limiting the utilization of ITC, businesses may have to make additional cash payments towards their tax liability, which can put a strain on their finances. It becomes crucial for businesses to carefully plan their cash flow and tax payments to ensure compliance with Rule 86B without hampering their operations.
It is important to stay updated with the latest developments and changes in the GST regime to ensure compliance. Here are some of the recent updates related to ITC:
1st February 2022:
29th December 2021:
21st December 2021:
Before the introduction of Rule 86B, businesses had the flexibility to fully utilize the ITC available in their electronic credit ledger for discharging their output tax liability. The order of utilization of ITC for different components, such as CGST, SGST, and IGST, has undergone changes over time. However, there were no restrictions on the utilization of ITC as long as the taxpayer had a sufficient balance in their electronic credit ledger.
Rule 86B has both benefits and drawbacks for businesses. Let's explore them in detail:
To comply with Rule 86B, businesses need to ensure that they do not utilize more than 99% of their ITC balance to discharge their output tax liability. They should monitor their ITC utilization on a monthly basis and make necessary adjustments to comply with the rule. Additionally, businesses should maintain proper records and documentation to substantiate their compliance with Rule 86B.
Rule 86B under GST introduces restrictions on the utilization of ITC for discharging the output tax liability. While it aims to prevent tax evasion and misuse of ITC, it also poses challenges for businesses in managing their working capital and cash flow. It is crucial for businesses to stay updated with the latest developments and comply with the requirements of Rule 86B to ensure smooth operations and avoid penalties. By understanding the implications of Rule 86B and adopting appropriate strategies, businesses can navigate the GST regime effectively while maintaining compliance with the law.
The CGST Rule 86B states that taxpayers are restricted to using the electronic credit ledger for payment of up to 99% of their tax liability. The remaining 1% must be paid in cash.
The electronic credit ledger, maintained in FORM GST PMT-02 on the common portal, is for each registered person eligible for input tax credit under the Act. Every claim of input tax credit under the Act will be credited to this ledger.
What is the maximum Input Tax Credit (ITC) that can be used to pay GST liability? Starting from January 1, 2021, some taxpayers are restricted from using the ITC balance in the electronic credit ledger to cover more than 99% of the tax liability for a tax period. This implies that at least 1% of the tax liability must be settled using cash.
Officers have the authority to suspend the input tax credit, causing significant challenges for taxpayers during the COVID lockdown. Many businesses are either operating from home or closed. The outdated requirements need to be revised to align with the current situation.