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All You Need to Know About Rule 86B under GST: Restriction on ITC Utilization in Electronic Credit Ledger

Introduction

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.

Table of Contents

  1. Overview of Rule 86B
  2. Applicability of Rule 86B
  3. Restrictions Imposed by Rule 86B
  4. Exceptions to Rule 86B
  5. Impact of Rule 86B on Businesses and Working Capital
  6. Latest Updates on ITC under GST
  7. How was ITC Utilization Allowed Before Rule 86B?
  8. Benefits and Drawbacks of Rule 86B
  9. Compliance and Reporting Requirements
  10. Conclusion

1. Overview of Rule 86B

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.

2. Applicability of Rule 86B

Rule 86B is applicable to registered persons meeting the following criteria:

  • Taxable value of supply (excluding exempt and zero-rated supplies) in a month exceeds Rs. 50 lakh.
  • The criteria must be checked every month before filing each return.

3. Restrictions Imposed by Rule 86B

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.

4. Exceptions to Rule 86B

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:

  1. Persons who have paid more than Rs. 1 lakh as income tax under the Income Tax Act, 1961.
  2. Proprietors, kartas, managing directors, partners, or whole-time directors of the registered person.
  3. Registered persons who have received a refund of more than Rs. 1 lakh in the preceding financial year on account of export under Letter of Undertaking (LUT) or due to the inverted tax structure.
  4. Registered persons who have discharged their tax liability through the electronic cash ledger for an amount exceeding 1% of the total output tax liability up to the said month in the current financial year.
  5. Government departments, public sector undertakings, local authorities, and statutory authorities.

5. Impact of Rule 86B on Businesses and Working Capital

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.

6. Latest Updates on ITC under GST

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:

  • ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
  • Time limit to claim ITC on invoices or debit notes of a financial year is revised to the earlier of two dates: 30th November of the following year or the date of filing annual returns.
  • Section 38 is revamped as 'Communication of details of inward supplies and input tax credit,' in line with Form GSTR-2B. It provides information on eligible and ineligible ITC for claims.
  • Section 41 is revamped to remove references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
  • Sections 42, 43, and 43A on provisional ITC claim process, matching, and reversal are eliminated.

29th December 2021:

  • CGST Rule 36(4) is amended to remove 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and appears in their GSTR-2B.

21st December 2021:

  • From 1st January 2022, ITC claims will be allowed only if they appear in GSTR-2B. Taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4) and must ensure that every ITC value claimed is reflected in GSTR-2B.

7. How was ITC Utilization Allowed Before Rule 86B?

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.

8. Benefits and Drawbacks of Rule 86B

Rule 86B has both benefits and drawbacks for businesses. Let's explore them in detail:

Benefits:

  • Prevents tax evasion and misuse of ITC by restricting its utilization.
  • Helps in curbing the issue of fake invoices and fake ITC claims.
  • Enhances the integrity of the GST system by ensuring that taxpayers can only use a certain percentage of their ITC balance to discharge their tax liability.

Drawbacks:

  • Puts additional burden on medium and large taxpayers, affecting their working capital management and cash flow.
  • Requires businesses to carefully plan their tax payments to comply with Rule 86B without hampering their operations.
  • Increases the administrative burden for businesses in tracking and managing their ITC utilization.

9. Compliance and Reporting Requirements

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.

10. Conclusion

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.

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

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.

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