All about Rule 86B under GST: Restriction on ITC Utilisation in Electronic Credit Ledger

The Central Board of Indirect Taxes and Customs (CBIC) has introduced new rule 86B vide notification number 94/2020 dated 22nd December, 2020. Rule 86B is made effective from 1st January 2021.

Latest Updates on ITC under GST

28th May 2021
CGST Rule 36(4) to cumulatively apply for April, May and June 2021 while filing GSTR-3B of June 2021.

1st May 2021
The CGST Rule 36(4) restricting provisional ITC claims to 5% of GSTR-2B in GSTR-3B is relaxed for April 2021. The taxpayer can apply this rule cumulatively for both April and May while GSTR-3B for May 2021.

1st February 2021
Budget 2021 update: Section 16 amended to allow taxpayers’ claim of the input tax credit based on GSTR-2A and GSTR-2B. Henceforth, the input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.

22nd December 2020
Following are the changes in Rule 36(4) from 1st January 2021:
1. The ITC shall be available as per the invoices uploaded by respective suppliers either in their GSTR-1 or by using the Invoice Furnishing Facility (IFF).
2. The recipients can claim provisional input tax credit in GSTR-3B to the extent of 5% instead of earlier 10% of the total ITC available in GSTR-2B for the month.

Certain taxpayers cannot make payment from their electronic credit ledger in excess of 99% of the total tax liability for the tax period as per a new rule 86B.

3rd April 2020
The CBIC has notified that taxpayers can claim input tax credit in the GSTR-3B return from February 2020 to August 2020, without applying the rule of capping provisional ITC claims at 10% of the eligible ITC as per GSTR-2A.

While filing the GSTR-3B of September 2020, the taxpayers must cumulatively adjust ITC as per the above rule from February 2020. 

How was ITC utilisation allowed before Rule 86B

Input tax credit plays a very important role in GST by avoiding cascading effect of taxation. The order of utilisation of ITC for different components such as CGST, SGST and IGST has gone through a lot of changes. However, the ITC available in the electronic credit ledger could always be fully utilised for discharging the output tax liability. The new Rule 86B has limited the use of ITC balance for paying its output tax liability.

What is the restriction imposed under Rule 86B

Rule 86B limits the use of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule has an overriding impact on all the other CGST Rules.

Applicability: This rule is applicable to registered persons having taxable value of supply (other than exempt supply and zero-rated supply) in a month which is more than Rs.50 lakh. The limit has to be checked every month before filing each return.

Restriction imposed: The applicable registered persons cannot use ITC in excess of 99% of output tax liability. In simple words, more than 99% of the output tax liability cannot be discharged by using input tax credit.

Exceptions to the Rule:

• If the persons mentioned below have paid more than Rs.1 lakh as Income Tax under Income Tax Act, 1961
  • The registered person
  • Proprietor, karta or Managing Director of the registered person
  • Any of the partners or whole time directors or any other person as the case may be.
• 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.
• 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.
• If the registered person under concern is any of the following:
  • Government department
  • Public sector undertaking
  • Local authority
  • Statutory Authority

Impact of Rule 86B on businesses & working capital

After going through the above restrictions and exceptions introduced by Rule 86B, it is clear that the above rule is applicable only to the large taxpayers. There will be no impact on micro and small businesses. 

The motto behind the introduction of this rule is to control the issue of fake invoices to use the fake input tax credit to discharge liability. Further, it restricts fraudsters from showing high turnovers without having any financial credibility.

CBIC has further clarified that 1% is to be calculated on the tax liability in a month and the turnover of the respective month. 

Illustration

Let us understand this with the help of an example:

A taxpayer Mr A has made a sale of goods valued at Rs. 1 crore on which tax rate is 12%. In this case, he can discharge his liability up to 99% through ITC and must pay Rs. 12,000 in cash, as per this rule.

Though this rule has also brought genuine taxpayers under ambit making it inconvenient for them, the motto of the Government is to avoid fake invoicing and eventually curb tax evasion.

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