The Central Board of Indirect Taxes and Customs (CBIC) introduced Rule 86B through Notification No. 94/2020 dated 22nd December 2020, which came into effect on 1st January 2021.
ITC Utilization Before Rule 86B
Input Tax Credit (ITC) plays a crucial role in GST by preventing the cascading effect of taxation. Over time, the order of ITC utilization for CGST, SGST, and IGST has undergone several changes. However, prior to Rule 86B, businesses could fully utilize the ITC available in their electronic credit ledger to pay their output tax liability. With the introduction of this rule, the usage of ITC for tax payments has been restricted.
Restriction Imposed Under Rule 86B
Rule 86B imposes a limitation on the utilization of ITC for discharging output tax liability. This rule overrides other CGST rules.
Applicability
- It applies to registered businesses with a taxable supply value (excluding exempt and zero-rated supplies) exceeding ₹50 lakh in a given month.
- This threshold must be checked before filing each GST return.
Restriction on ITC Usage
- Affected taxpayers cannot use ITC for more than 99% of their total output tax liability.
- In simple terms, at least 1% of the output tax liability must be paid in cash.
Exceptions to Rule 86B
The restriction does not apply if:
- Income Tax Paid Criteria
- The taxpayer, or key personnel such as the proprietor, managing director, or partner, has paid more than ₹1 lakh as income tax under the Income Tax Act, 1961 in each of the last two financial years for which the ITR filing deadline has expired.
- Refunds Received
- The registered person received a GST refund exceeding ₹1 lakh in the previous financial year due to exports under LUT or an inverted tax structure.
- Cash Ledger Payment Condition
- The taxpayer has paid over 1% of total output tax liability in cash (cumulatively) up to the said month in the current financial year.
- Exempted Entities
- The rule does not apply to:
- Government departments
- Public sector undertakings (PSUs)
- Local authorities
- Statutory authorities
- The rule does not apply to:
Impact of Rule 86B on Businesses and Working Capital
Since Rule 86B is applicable mainly to large taxpayers, it does not affect small and micro businesses. The rule aims to curb tax fraud by preventing the misuse of fake invoices for illegitimate ITC claims. It also deters fraudulent businesses from inflating turnovers without genuine financial credibility. We provide many services like GST registration, GST refund services, GST return filing, & GST Cancellation Services.
CBIC has clarified that the 1% cash payment is calculated based on the tax liability for the respective month.
Illustration
For instance, consider Mr. X, who makes taxable sales worth ₹1 crore with a GST rate of 12%.
- The total tax liability = ₹12 lakh
- Under Rule 86B, he can use ITC for 99% of this amount.
- He must pay ₹12,000 in cash (1% of ₹12 lakh).
Conclusion
Although Rule 86B also impacts genuine taxpayers by requiring some cash payments, its primary goal is to combat fake invoicing and prevent tax evasion.
FAQs on Rule 86B of GST: Restriction on ITC Utilization
1. What is Rule 86B in GST?
Rule 86B restricts the use of Input Tax Credit (ITC) for paying output tax liability. It mandates that certain taxpayers must pay at least 1% of their total GST liability in cash, rather than fully utilizing ITC.
2. When was Rule 86B introduced?
Rule 86B was introduced by the Central Board of Indirect Taxes and Customs (CBIC) through Notification No. 94/2020, dated 22nd December 2020, and became effective from 1st January 2021.
3. Who is affected by Rule 86B?
This rule applies to businesses whose monthly taxable supply value exceeds ₹50 lakh (excluding exempt and zero-rated supplies).
4. What is the restriction imposed under Rule 86B?
Taxpayers covered under this rule cannot use ITC to pay more than 99% of their total output tax liability. At least 1% of the tax liability must be paid in cash.
5. Are there any exceptions to Rule 86B?
Yes, the rule does not apply if:
- The taxpayer or key managerial personnel (proprietor, partner, MD) has paid more than ₹1 lakh in income tax in the last two financial years.
- The taxpayer has received a GST refund of more than ₹1 lakh in the previous financial year due to exports or an inverted tax structure.
- The taxpayer has already paid at least 1% of total output tax liability in cash cumulatively in the current financial year.
- The taxpayer is a government department, PSU, local authority, or statutory authority.
6. How does Rule 86B impact businesses?
It mainly affects large businesses by restricting the use of ITC. While it helps curb tax fraud and fake invoicing, genuine taxpayers may face cash flow challenges.
7. How is the 1% cash payment calculated?
The 1% cash payment is calculated based on the total tax liability for a particular month, not the overall turnover.
8. Can a business fully utilize ITC after meeting the 1% cash payment requirement?
Yes, once the business has paid at least 1% of its total GST liability in cash, it can use the remaining ITC to pay the rest of its tax dues.
9. How does Rule 86B prevent tax fraud?
By requiring a minimum cash payment, Rule 86B prevents fraudulent businesses from using fake invoices to claim and utilize ITC without any real financial transactions.
10. Does Rule 86B apply to small businesses?
No, small and micro businesses with a monthly taxable supply of ₹50 lakh or less are not affected by this rule.
11. Can a taxpayer request an exemption from Rule 86B?
No, there is no provision for an exemption. However, if the taxpayer meets any of the exception criteria, the rule automatically does not apply.
12. What happens if a taxpayer fails to comply with Rule 86B?
Non-compliance may result in penalties, interest charges, and legal consequences, as per GST law.
13. Can businesses challenge Rule 86B?
Rule 86B is a legal provision under GST law. Businesses facing difficulties may seek clarification from the GST department or consult a tax professional.
14. How does Rule 86B impact working capital?
Since businesses must pay at least 1% of tax liability in cash, it may reduce ITC utilization and affect cash flow, especially for large taxpayers.
15. Where can businesses get more information on Rule 86B?
Businesses can refer to official CBIC notifications, GST portals, or consult a chartered accountant or tax consultant for guidance.
