GST – Rule 86B – detailed analysis

Rule 86B :- Restrictions on use of amount available in electronic credit ledger

[notification no. 94/2020 dated 22/12/2020]

♦ 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 99% of such tax liability, in cases where the value of taxable supply in a month exceeds 50 Lakhs other than

• exempt supply and zero-rated supply.

Analysis :-

Basic provision :- There are 2 stages in relation to input tax credit [ITC] :-’

• Availment of ITC :- It means recording ITC in statutory records i.e. e-credit ledger by filing return. The restriction prescribed in this rule [Rule 86B] does not apply to this stage.
• Utilization of ITC :- It means payment of liability using the balance in e-credit ledger i.e. by utilizing ITC.

The restriction prescribed in this rule applies to this stage.

♦ Provision/Restriction of the new rule [Rule 86B] :-While discharging the output tax liability for a month, ITC
shall be utilized only to the extent of 99% of output tax liability subject to availability of ITC.

• Thus, it means that minimum 1% of the output tax liability shall be discharged in cash using e-cash ledger
• Example :-

♦ Taxable turnover during April, 2021 = Rs. 1,00,00,000

♦ Applicable tax rate = 18%

♦ Thus amount of tax = Rs. 1,00,00,000 * 18% = Rs. 18,00,000

♦ Input tax credit after considering rule 36(4) = Rs. 20,00,000

Rule 36(4) :- availment of ITC is restricted to 5% of reported supplies in respect of supplies which are not auto-populated in form GSTR-1

♦ Pre-amendment :- Supplier was allowed to pay full liability of Rs. 18,00,000 by utilizing ITC i.e. from e-credit ledger because he has Rs. 20,00,000 in e-credit ledger.

• The balance in e-credit ledger after utilization would be Rs. 2,00,000 [20L -18L]
• No liability is to be discharged using e-cash ledger

♦ Post-amendment : utilization of e-credit ledger is restricted to maximum of 99% of output tax liability

• Therefore, utilization from e-credit ledger will be restricted to Rs. 17,82,000 [18L * 99%]
  • The balance in e-credit ledger after utilization would be 2,18,000 [20L – 17.82L]
  • The balance liability of Rs. 18,000 is to be discharged using e-cash ledger.

♦ Author :- The restriction applies on payment of OUTPUT TAX. So, can I discharge my input tax liability which attracts RCM by using ITC without any restriction of rule 86B?

• Answer :- As per section 49(4), The balance of ITC in e-credit shall be used only towards discharging output tax i.e. RCM liability shall be discharged ONLY using e-cash ledger. Therefore, utilization of ITC to discharge RCM liability is not allowed at all, thus the question of imposing such restriction shall not arise

♦ Provision starts with non-obstante clause :- which means that the provision specified in this rule will prevail
over provisions specified in other rules.

♦ Applicability of restriction :-

• It applies in the month where VALUE OF TAXABLE SUPPLY exceeds Rs. 50 Lakhs in the month

♦ Example :- Value of taxable supplies > Rs. 50 Lakhs in the month of April, 2021, then the provision of this rule will apply. However in the next month [May, 2021], such value of taxable supply does not exceeds Rs. 50 Lakhs then the provision of this rule will not apply.

• Meaning of VALUE OF TAXABLE SUPPLY :- Section 2(108) :- it means a supply of goods or services or both which is leviable to tax

♦ Thus, it includes every supply where charge is created as per section 9 of CGST or section 5 of IGST.

• However 2 exclusions have been provided in this rule :-

♦  Zero-rated supply :- Section 2(23) of IGST Act read with section 16 of IGST Act

♦  Export of goods or services or both

♦  Supply of goods or services or both to SEZ unit or developer

♦ Exempt supply :- Defined in section 2(47)

♦ Supplies which are wholly exempt from tax

♦ Supplies attracting NIL rate of tax in tariff

♦ Supplies which are non-leviable to tax

• • alcoholic liquor for human consumption
  • 5 petroleum products [Crude oil, motor spirit, high speed diesel, aviation turbine fuel, natural gas]

1st Proviso

Provided that the said restriction shall not apply where –  ♦ The restriction applies to RP whose taxable turnover, as discussed above, exceeds Rs. 50L in a month. However this proviso grants relief to following persons who gets covered in the above condition. – Clause Content (a)   Analysis :- ♦ This relaxation is linked with payment of income tax > Rs. 1,00,000. It means that if the specified persons have paid income tax > Rs. 1,00,000 in each of the last 2 financial years, then the person can utilize full amount of ITC without having this restriction. ♦ To avail relaxation :- this condition is to be checked for last 2 financial year for which time limit to file return under section 139(1) of income tax act has been expired. ♦ Author :- Time limit should have been expired on the date of filing return under GST ♦Payment of income tax :- Includes Excludes ♦ Self assessed tax paid As per normal provisions or As per MAT provisions ♦ Tax deducted or collected [taxpayer is the person whose tax is deducted or collected] ♦ Advance tax ♦ Tax paid on account of dividend distribution tax [DDT] as per section 115-O of income tax Act. ♦ Interest or late fees paid   Additional analysis for partnership firm ♦ Condition :- Income tax payment in excess of Rs. 1,00,000 should have been done in last 2 FY for which time limit to file return under section 139(1) has been expired :- Either by the partnership firm itself or By any of its 2 partners Examples framed by author :- Answers are based on author’s opinion Sr Example Discussion Restriction  apply? 1 When this condition is fulfilled by firm in last 2 financial years ♦ Since such condition is fulfilled by the said person itself Will not apply 2 When this condition is fulfilled by partners in last 2 financial years [Assume 5 partner named as A, B, C, D, E] ♦  If such condition is fulfilled by partner A & B for the last 2 years Will not apply If such condition is fulfilled by ♦  Partner A & partner B in year 1 & ♦  Partner B & partner C in next year Will not apply ♦  Question :- What shall be your answer if partner “A” retires in subsequent year?  Answer :- It shall still be deemed as the condition was fulfilled by one of its partner. Thus restriction shall not apply.  ♦  i.e Existence of partner on the date of applying such restriction is not necessary.  Author’s logic :- The intention of the government could be that, while partners are in such firm, whether they have paid income tax exceeding Rs. 1,00,000 or not? If paid, then it should be considered for this proviso irrespective of the fact that he has resigned in subsequent year. 3 When this condition is fulfilled by firm in 1 of the year & by partners in another year  Author is of the opinion that this condition should be fulfilled by either firm or any 2  partners in last 2 FY. Will apply This analysis mutatis mutandis will also apply in case of a company because either the company or the managing director or ALL the whole time directors [WTDs] can fulfill this condition. ♦  i.e. if company pays income tax > Rs. 1 Lakhs then others need not satisfy this condition ♦  If MD pays income tax > Rs. 1 Lakhs then others need not satisfy this condition ♦  If all the WTDs pay income tax > Rs. 1 Lakhs then others need not satisfy this condition (b) ♦ Proviso says that :– the registered person has received a refund amount of more than one lakh rupees ♦ in the preceding financial year on account of zero-rated supplies made without payment of IGST or  Analysis :- ♦  This relaxation is linked with RECEIPT of refund of ITC on account of zero-rated supplies effected without payment of IGST i.e. effected under bond or LuT. Refund should be > Rs. 1,00,000 ♦  Such refund should have been received in the PRECEDING financial year. ♦  Value of zero-rated supplies either effected with payment of IGST or effected under bond or LuT shall not be included in value of taxable supply for determining applicability of this restriction [i.e. for calculating 50 lakhs limit]. ♦  However, once it is established that rule 86B applies, then the following table shall be checked to analyse whether registered person falls within exception given in this proviso. Zero-rated supply :- 1) Exports & 2) Supplies to SEZ Type Sub-type Proviso apply? Restriction apply With payment of IGST  – No  Yes  Without payment  of IGST  [under bond/LuT] Refund of ≤ Rs. 1,00,000 claimed in PFY No Yes Author’s view :- Govt. should have exempted such RP from applicability of this rule   Refund of > Rs. 1,00,000 claimed in PFY Yes No (C) ♦ Proviso says that :- the registered person has received a refund amount of more than one lakh rupees ♦ in the preceding financial year on account of inverted tax structure; or Analysis :- ♦ This relaxation is linked with RECEIPT of refund of ITC on account of inverted tax structure Refund should be > Rs. 1,00,000 ♦ Such refund should have been received in the PRECEDING financial year. ♦ Value of inverted tax structure supplies shall be included in value of taxable supply for determining applicability of this restriction [i.e. for calculating 50 lakhs limit]. ♦ However, once it is established that rule 86B applies, then it needs to be checked that whether the registered person falls within the exception given in this proviso Inverted tax structure supply :- Where tax rate on input is higher than the tax rate on output resulting into accumulation of ITC, thus refund is allowed and rule 86B is not applied. (d) ♦ Proviso says that :- 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; Analysis :- ♦ This relaxation states that if the person has paid more than 1% using e-cash ledger for discharging OUTPUT TAX upto the said month in current financial year then this restriction will not apply i.e. no need to pay 1% using cash in current month if registered person has sufficient input tax credit. ♦ Example :- In the year 2021-2022, up to November 2021, ♦ output tax liability comes to Rs 10 lakhs and ♦ registered person has deposited more than Rs 10,000 in cash for discharging output tax liability up to November 2021 ♦ then this rule is not applicable for December, 2021. ♦ Since 1% payment by cash is to be checked in “current” FY therefore, in the month of April of any financial year [being the 1st month], this proviso will not be applicable. Thus, RP will have to discharge at least 1% using cash ledger in the month of April, if such RP is not covered in any other proviso ♦ RCM liability discharged using cash in current financial year shall not be taken into account for computing “more than 1% of total output tax liability upto the said month has been discharged in cash”. ♦ Example :- ♦ Output tax liability upto November 2021 = 10,00,000 Discharged using ITC = Rs. 9,93,000 Discharged using cash = Rs. 7,000 RCM liability discharged in cash = Rs. 28,000 Thus total liability discharged in cash = Rs. 7,000 + Rs. 28,000 = Rs. 35,000 If we use this amount to determine that whether 1% has been paid in cash, then the answer would be = Yes because 3.5% is discharged by using cash, thus this restriction does not apply. However this approach is wrong. ♦ The correct approach = Rs. 7,000/10,00,000 = .7% is discharged using cash for discharging output tax liability which is not more than 1% of total output tax liability therefore the restriction applies in December 2021 month. ♦ This clause will be the biggest relief for most of the registered persons. (e) ♦ Proviso says that :- the registered person is Government Department or A Public Sector Undertaking or A local authority or A statutory body Analysis :- This proviso relax the above specified registered person to utilize full ITC for payment of output tax liability with the logic that they are either government controlled entities or statutory bodies who will not be engaged in fraudulent malpractices.

2nd Proviso

♦ 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 Analysis :- ♦ This proviso gives power to the commissioner or the officer authorised by him in this behalf to remove the applicability of this rule/restriction. But such removal shall be after proper verifications and after keeping such safeguards as the commissioner or the authorised officer deems fit. ♦  Author’s view :- ♦  if you are a genuine tax payer then you can apply to the commissioner or authorised officer with proper documentation to remove the applicability of this rule/restriction on you and officers will remove after proper verification. ♦  Government has given discretion to commissioner or authorised officer to verify and to order removal of applicability of this rule/restriction.. ♦  This might result into harassment of a taxpayer by the authority. ♦  Government should come up with certain guidelines to help the requisite officers and such guidelines should be made public to maintain transparency and to reduce the harassment.

Issue which will arise in application of this rule

Issue 1 :- whether restriction on utilization is to applied head wise or on aggregate basis?

Author’s opinion :- The restriction on utilization is to be applied on aggregate basis. However, there are high chances that officers of department will apply this restriction separately on each tax head i.e. CGST, IGST, SGST/UTGST.

Disclaimer :-

♦ The views expressed in this material are merely for general guide meant for learning purposes only. All the instructions, references, content, or documents are for educational purposes only and do not constitute legal advice. We do not accept any liabilities whatsoever for any losses caused directly or indirectly by the use/reliance of any information contained in this material or for any conclusion of the information. Prior to acting upon this material, you’re suggested to seek the advice of your financial, legal, tax, or professional advisors as to the risks involved may be obtained and necessary due diligence, etc may be done at your end.

♦ Also, This material is based on current public information that we consider reliable. Any change in current public information might change the views expressed in this material.