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Rule 86B of GST - Impacts Business and Working Capital

Rule 86B, effective from January 1, 2021, restricts the use of Input Tax Credit (ITC) in the electronic credit ledger for registered persons with taxable supplies exceeding Rs. 50 lakh per month, limiting ITC utilization to 99% of their output tax liability. Exceptions apply for those who have paid significant income tax, received refunds, or are government entities. The rule aims to combat fraudulent practices related to fake invoices and tax evasion, primarily impacting large taxpayers while leaving micro and small businesses unaffected.

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31 views2 pages

Rule 86B of GST - Impacts Business and Working Capital

Rule 86B, effective from January 1, 2021, restricts the use of Input Tax Credit (ITC) in the electronic credit ledger for registered persons with taxable supplies exceeding Rs. 50 lakh per month, limiting ITC utilization to 99% of their output tax liability. Exceptions apply for those who have paid significant income tax, received refunds, or are government entities. The rule aims to combat fraudulent practices related to fake invoices and tax evasion, primarily impacting large taxpayers while leaving micro and small businesses unaffected.

Uploaded by

Ibrahim Mohammad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Rule 86B of GST: Restriction on ITC Utilisation in

Electronic Credit Ledger


1 min read
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
e ective from 1st January 2021.
How was ITC utilisation allowed before Rule 86B
Input Tax Credit plays a very important role in GST by avoiding cascading e ect of
taxation. The order of utilisation of ITC for di erent 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 in each of the last two financial years for which the
time limit to file the income tax return under Section 139(1) of the said Act has
expired:
 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.

Mohammad Ibrahim & Co. Chartered Accountants


 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.

Reach us out to know more about the GST rules:


For any enquiries on the above, please contact Mohammad Ibrahim & Co. at
ibbucahyd@gmail.com or +91-7997452208

Mohammad Ibrahim & Co. Chartered Accountants

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