Rule 86B of the Central Goods and Services Tax Rules, 2017 places certain restrictions on the utilization of input tax credit available in the electronic credit ledger. The rule aims to curb tax evasion through fake invoicing and restricts large taxpayers from discharging their entire output tax liability through input tax credit.
Need for this Rule:
The rule was introduced to address the issue of fake invoicing and input tax credit fraud. By limiting the use of ITC, the government aims to make it difficult for businesses involved in tax evasion to show high turnover without actual business transactions.
As per Rule 86B, registered persons whose taxable supplies (other than exempt and zero rated) exceed Rs. 50 lakh in a month cannot utilize more than 99% of their input tax credit for paying output tax. There are certain exceptions to this rule for taxpayers meeting specific conditions.
Relevant Legal Provision-
[Rule 86B. Restrictions on use of amount available in electronic credit ledger.-
Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:]
The rule is only applicable to large taxpayers with high turnover. It aims to restrict the misuse of ITC by businesses generating fake invoices to avail input tax credit. However, it also brings genuine large taxpayers under its ambit, making it inconvenient for them. The government`s objective is to curb tax evasion while minimizing compliance burden.
However In certain exceptional cases provided under the rule taxpayer is not required to make payment of 1% of liability in cash such provisions are enumerated as under-
[Provided that the said restriction shall not apply where –
(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961 (43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or
(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of subsection (3) of section 54; or
(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or
(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or
(e) the registered person is –
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii) a local authority;or
(iv) a statutory body:
Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.
Input tax credit (ITC) that is claimed in accordance with Section 16 and Rule 36 of the CGST Act, 2017 is credited to the electronic credit ledger maintained under Rule 86 of the registered person. This ITC can then be utilized to offset the entity`s output tax liability as specified under Section 49. However, the usage of ITC is subject to the restrictions outlined in Rules 86A and 86B.
Importantly, Rule 86B supersedes all other CGST rules. It begins with a non-obstante clause, indicating that it overrides any other provisions. If a registered person supplies taxable goods or services (excluding exempt supplies or exports with or without an LUT) exceeding Rs. 50 lakhs in a month, then 1% of the tax liability for that month must be paid in cash.
Rule 86B specific amendments:
Violation of rule 86B has been added to rule 21 meaning thereby that a person’s gst registration could be canceled if he or she fails to pay 1% of liability in cash.
A registered person, who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax in excess of ninety-nine per cent. of such tax liability under rule 86B, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR-1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR-3B for preceding tax period. Rule 59(6)(c).
The export related Refunds should not be rejected due to minor procedural lapse or non-substantive errors or omission which can be rectified subsequently.
In given case, since there was only procedural lapse while applying for refund, the department should not take adverse action on the taxpayer.
CGST-APPEALS, JAIPUR in case of Baba Super Minerals Pvt. Ltd. V/s The Assistant of Commissioner CGST Division  23 TAXLOK.COM 034 (CGST-Appeals, Jaipur) held that, the export related refunds should not be rejected due to minor procedural lapse or non-substantive errors or omission which can be rectified subsequently.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
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