Restriction on ITC Utilization As Per New Rule 86B

The Central Board of Indirect Taxes and Customs (CBIC) in India has introduced new rule 86B in  CGST (Central Goods and Services Tax) Rules vide notification number 94/2020 dated 22.12.2020. The rule 86B became effective from 01.01.2021.

As per the stated rule, a registered person shall not use the amount available in electronic-credit ledger to discharge his liability towards output tax in excess of 99% of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds 50 lakh rupees.

Exceptions to Rule 86B :

  • the person has paid more than 1 lakh rupees as income tax in each of the last 2 F.Y. for which the time limit to file return of income under sub-section (1) of section 139 of the Income Tax Act has expired;
  • the registered person has received a refund amount of more than 1 lakh rupees in the preceding financial year on account of unutilised input tax credit under Sec 54(3) for zero-rated supplies or inverted duty structure;
  • 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, up-to the said month in the current financial year;
  • the registered person is Govt Department, PSU, local authority or a statutory body.

For facilitating registered persons, CBIC has also issues clarifications to clear misconceptions prevailing in the industry regarding application of Rule 86B. Following misconceptions have been cleared by CBIC:

Misconception 1 : Large number of taxpayers would be affected by Rule 86B.

Reality: Rule 86B provides for various exemptions like exporters, suppliers of goods of inverted duty structure, taxpayers having a footprint in the Income Tax database etc. It is expected that this rule would be applicable to less than 0.5% of the total taxpayer base of 1.2 crores. The rule clearly identifies where the risk to revenue is high & imposes deterrence to the fraudsters in a multiple-layered fraud of passing fake ITC. This rule would help to control such fraudsters, who issue fake invoices & show high turnovers, but they have no financial credibility and flee after misusing ITC without payment of any tax liability in cash.

Misconception 2 : The requirement of cash payment of 1% liability will create huge burden on small businesses and will increase their working capital requirement.

Reality : The cash payment of 1% is to be calculated on the tax liability in a month and not turnover of the month. In fact, it amounts to only 0.01% of turnover. For example, if a dealer has made sale of Rs. 1 crore of the goods whose tax rate is 12% and if he is discharging his tax liability more than 99% thorough ITC, then he has to pay only Rs. 12,000 under this rule. On the other hand, a composition dealer would have paid Rs. 1 Lakh in cash with this volume of sale. 

Misconception 3 : This rule adversely affects small & medium enterprises.

Reality : The new provision which restricts the use of ITC for discharging output liability is applicable to the registered person whose value of taxable supply other than exempt supply and export, in a month exceeds Rs. 50 Lakhs – that means those whose annual turnover is more than Rs. 6 crores. Therefore, the rule does not apply to micro and small businesses and composition dealers.

Misconception 4 : All the registered persons will be required to pay 1% cash liability.

Reality : This rule is applicable to only those registered persons whose value of taxable supply, other than exempt supply and export, in a month exceeds Rs. 50 Lakhs – that means those whose annual turnover is more than Rs. 6 crores.

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by:

CA Mitika Batta

AKGVG & Associates

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