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.
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.
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:
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.
Rule 86B limits ITC use to 99% of output tax liability for businesses exceeding Rs.50 lakh monthly. Exceptions include high-income tax payers and refunds. Aimed at preventing fake invoices, it affects large taxpayers only. CBIC clarifies 1% limit. Businesses may find compliance challenging due to limited ITC usage. Government intends to combat tax evasion through this rule.