Rule 86B in GST- Restriction on use of Input Tax Credit

Introduction

Since its introduction in 2017, the Goods and Services Tax (GST) has revolutionized the Indian tax system, aiming to create a seamless and unified tax regime. To ensure compliance and prevent fraudulent activities, the government periodically introduces amendments and rules.

In this article, we will delve into the details of Rule 86B in GST, explaining its purpose, implications, and how it affects businesses.

Understanding Rule 86B

Rule 86B was introduced by Notification No. 94/2020 Dated 22.12.2020 as an anti-tax evasion measure under CGST Rule 2017. The primary objective of this Rule is to target fraudulent practice of fraudulent input tax credit claims and curb the misuse of ITC. This rule restricts taxpayers to the utilization of ITC available in the Electronic credit ledger.

Restriction Imposed under Rule 86B

Rule 86B limits the utilization of available ITC in the electronic credit ledger to discharge the output liability. This rule has an overriding impact on all other CGST rules.

• Applicability:
  Registered person having taxable supplies (other than exempted or Zero rated supplies) of more than Rs. 50 lakhs in a month has to follow Rule 86B. This limit of Rs.50 lakhs has to be checked every month.
• Restriction of Rule 86B
  Registered persons who fulfill the above criteria are restricted to use only up to 99% of outward liability through Available ITC in the electronic credit ledger. This means 1% of outward liability to be paid in Cash even when ITC is available.
• Exception to Rule 86B
  f registered person or proprietor, karta or Managing Director of the registered person or any of the partners or whole time directors or any other person 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 a return of income under subsection (1) of section 139 of the said Act has expired. If the registered person under concern has received a refund of an amount greater than Rs.1 lakh in the preceding financial year on account of export under LUT or due to an inverted tax structure. If the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount that is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial yearIf the registered person is -
• Government Department; or
• Public Sector Undertaking; or
• Local authority; or
• Statutory body.

• When restriction can be removed.
  The commissioner or an officer authorized by him may remove the restriction after such verification and such safeguards as may deemed fit.

Implications for Businesses

• Cash flow impact: The 1% cash payment requirement can have a significant impact on the cash flow of businesses even when ITC is available.
• Compliance challenges: Rule 86B imposes an additional compliance burden on taxpayers, requiring them to meticulously plan and manage their ITC utilization to ensure proper compliance of the rule.
• Effect on working capital: Since businesses must now allocate a portion of their GST liability for cash payment, it affects their working capital requirements.
• Increased documentation: To prove compliance with Rule 86B, businesses need to maintain accurate documentation of their income tax payments and GST refund receipts. This emphasizes the importance of maintaining detailed records to avoid any discrepancies.

Conclusion

Rule 86B in GST represents the government's efforts to prevent fraudulent practices and misuse of ITC provisions. While it strengthens the tax administration, it also presents challenges for businesses, impacting their cash flow and working capital requirements. To navigate these challenges effectively, businesses need to adapt their compliance processes and maintain meticulous records of their income tax payments and GST refunds.

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