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

1st February 2022
Budget 2022 updates-
1. ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
2. Time limit to claim ITC on invoices or debit notes of a financial year is revised to earlier of two dates. Firstly, 30th November of the following year or secondly, the date of filing annual returns.
3. Section 38 is completely revamped as ‘Communication of details of inward supplies and input tax credit’ in line with the Form GSTR-2B. It lays down the manner, time, conditions and restrictions for ITC claims and has removed the two-way communication process in GST return filing on the suspended return in Form GSTR-2. It also states that taxpayers will be provided information of eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove the references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
5. 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 it appears in their GSTR-2B.

21st December 2021
From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.

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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