Rule 86B has undergone severe criticism from various stakeholders ever since the same has been notified by the Government. It puts a restriction on the amount which can be used from the electronic credit ledger while making the payment of output taxes. Through this article, the author purports to analyze the provisions and its practical implications by answering the most commonly asked questions relating to this rule.
Q.1 What does the rule 86B require of the taxpayers?
Ans. It mandates cash payment of 1% of the output tax liability on a monthly basis for the registered persons who are covered by this rule. This payment of liability in cash would be required irrespective of the fact that there is an existing balance in the electronic credit ledger.
Q.2 Will this limit of 1% cash payment be calculated by including the reverse charge payments also?
Ans. The limit of 1% is on the output tax liability only. Reverse charge payments cannot be considered as payment of output taxes. Thereby, the limit of 1% will exclude the portion of taxes which has been paid under reverse charge.
Q.3 Which persons are required to comply with this rule?
Ans. Only registered persons who have taxable supplies of more than Rs. 50 lakhs in a particular month (subject to certain exceptions) must comply with this provision.
Q.4 If a registered person has a turnover of more than Rs. 50 lakhs in a particular month but less than Rs. 6 crores in a financial year, will he also be required to comply with the said rule?
Ans. One does not need to cumulatively calculate the taxable supplies by merging values of the earlier month. One needs to only find the taxable supplies of the current month to determine if it exceeds Rs. 50 lakhs. If yes, one needs to comply with this provision.
Thereby if in any month, the limit of Rs. 50 lakhs is not crossed but the turnover is more than Rs. 6 crores in a financial year, Rule 86B does not need to be complied with. On the other hand, if the turnover is less than Rs. 6 crores in a financial year but the taxable supplies for any month exceeds Rs. 50 lakhs, then Rule 86B stands attracted.
Q.5 If a registered person has multiple kinds of supplies i.e. taxable, exempt, non-taxable and exports, whether the limit of Rs. 50 lakhs should be calculated cumulatively?
Ans. The value of all zero-rated supplies including exports and supplies to SEZ will be excluded for calculating the limit of Rs. 50 lakhs. Further, the exempted supplies (which also includes non-taxable supplies) will also not be counted towards this Rs. 50 lakhs. Therefore, the limit of Rs. 50 lakhs will only be calculated by considering the taxable supplies.
For example, if in any month, taxable supplies are of Rs. 40 lakhs, exports of Rs. 20 lakhs and exempt supplies of Rs. 10 lakhs, Rule 86B will not be attracted in that month.
Q.6 If a registered person has both taxable (say Rs. 60 lakhs in a month) and zero rated supplies (Rs. 30 lakhs in a month), will the requirement of 1% payment in cash be applicable on both kinds of supplies?
Ans. For calculation of the threshold limit, the value of taxable supplies excluding the zero-rated supplies needs to be considered. However, for the purpose of payment of tax liability, 1% of the total output tax needs to be disbursed in cash. Therefore, where zero rated supplies are with payment of tax, 1% cash payment will still be required on output tax including that on zero rated supplies.
For example, if in any month, taxable supplies are of Rs. 60 lakhs and zero rated supplies with payment of tax is Rs. 40 lakhs, assuming the rate of GST of 18%, mandatory amount of 1%*100 lakhs*18% = Rs. 18000 must be paid in cash.
Q.7 Are there any exceptions to the list of registered persons who are required to comply with this rule?
Ans. The following persons are not required to comply with the restrictions:
a) The registered person or the Proprietor or the Karta or the Managing Director or any of its two partners, whole-time directors or members of Managing Committee of Association or Board of Trustees should have paid more than Rs. One lakh as income tax. This amount should have been paid in each of the two preceding financial years for which the time limit to file return of income under subsection section 139(1) of the said Act has expired.
b) the registered person has received a refund of more than Rs. One lakh in the preceding financial year under zero rated supplies (i.e. exports and supplies to SEZ)
c) The registered person has received a refund of more than Rs. One lakh in the preceding financial year under inverted duty structure
d) The registered person has discharged his liability towards output tax through electronic cash ledger in excess of 1% of total output tax liability applied cumulatively upto the said month in the current financial year
e) The registered person is –
i) Government Department or
ii) Public Sector Undertaking or
iii) Local authority or
iv) Statutory body
Q.8 Which financial years should be considered for calculating the limit of Rs. One lakh income tax when filing the return for the month of January 2021?
Ans. The due date of filing Income Tax return for the Assessment year 2020-21 has been extended for persons liable for tax audit / companies’ audit / partners of firms liable for audit etc. to 15th February 2021. Most of the taxpayers falling under Rule 86B would be having tax audit applicable to them. Thereby for compliance for the month of January 2021, the two preceding financial years for calculating the limit of Rs. One lakh would be the Assessment year 2019-20 and 2018-19.
Q.9 When meaning to state that refund in the preceding financial year should be more than one lakh, would the limit be calculated for all refunds taken together?
Ans. The limit of Rs. One lakh will be calculated for inverted duty structure and zero rated supplies separately. Thereby, the limit for the exports and supplies to SEZ developer or unit will be clubbed to determine Rs. One lakh but that of the inverted duty structure would be separate.
For example, if refund received for inverted duty structure is Rs. 60,000 and for exports is Rs. 50,000 in a year, the exceptions provided above will not be attracted. However, if the refund for supplies to SEZ had been Rs. 60,000 and for exports Rs. 50,000, the limit would be breached and Rule 86B would not be required to be complied with.
Q.10 Under the exception, whether the limit is refund received during the year or refund belonging to the year?
Ans. It has been clearly provided the limit is for refund received during the preceding financial year irrespective of the period for which the refund had been claimed.
For example, in the return for the month of January 2021, one needs to calculate the refund received during the year 2019-20. Assuming the refund received during 2019-20 was Rs. 1,20,000 wherein Rs. 70,000 belonged to 2018-19 and Rs. 50,000 to the year 2017-18, the exception would be said to be attracted and Rule 86B need not be complied with.
Q.11 How should the limit of 1% be applied cumulatively in the current financial year to check applicability of Rule 86B? Please explain with an example.
Ans. Let us assume the following example in order to determine the applicability of Rule 86B for month of January 2021:
|Month||Total GST payment (in lakhs)||Payment through|
|Cash (in lakhs)||Credit (in lakhs)|
Payment in cash cumulatively from April 2020 to December is 10/1050 = 0.95%. Thereby, the limit of 1% does not stand breached. Thereby, the exception to Rule 86B is not attracted.
Q.12 What is the intent of the Government behind notifying the said rule?
Ans. There are numerous entities all over India which engage in fake invoicing i.e. issue of invoices without actual supply of goods and / or services. These entities have a tendency only to receive credit and pass on credit to other entities without making any payment of taxes in cash. This rule has been notified in order to discourage these entities from issuing these kinds of fake invoices which results in evasion of tax revenue and looting of the government treasury. Thereby, this would help to control fraudsters who issue fake invoices, show high turnovers but have no financial credibility and flee after misusing ITC without payment of taxes in cash.
Q.13 Which kind of genuine taxpayers may also get covered within the ambit of this rule?
Ans. Small taxpayers having less than Rs. 50 lakhs worth of taxable supplies would not get covered. Also, through the exceptions discussed above, most of the genuine taxpayers are eliminated from the ambit of this rule. As per the twitter handle while clarifying the misconceptions on this rule, the CBIC has clarified not more than 0.5% taxpayers would be covered by this rule out of 1.2 crore taxpayers.
Though this rule has been notified with the right intention in mind, the government cannot help but cover a select group of genuine taxpayers as well within its ambit. An illustrative list of such taxpayers has been provided below:
a) An entity with heavy capital investment
b) Persistent loss making entities
c) Lower rate of input and output with a higher rate of tax on input services (e.g. a fabric trader having substantial overhead expenditure)
d) A new entity which has high initial expenditure and having low sales
e) An entity with high imports wherein the value of imported goods is inflated by Custom Laws
Q.14 Is there any legal way out for a genuine taxpayer to be excused from the mandatory 1% cash payment?
Ans: The Commissioner or any officer authorized by him have been given the power to remove the restrictions after such verification and safeguards as he may deem fit. This means that the genuine taxpayers who are unintentionally facing the brunt of this rule have an option of making an application before the Department. After observing the safeguards, it can exempt the relevant taxpayers from following this provision. Hence it is suggested that genuine taxpayers who are troubled by this new rule should carefully draft their representation to the Department in order to circumvent the restriction of making 1% tax payment through cash.
Q.15 What can be the legal consequences upon non-compliance with these rules?
Ans. There are multi fold implications of non-compliance with Rule 86B of the CGST Rules 2017:
a) Non submission of GSTR-1: Rule 59 of the CGST Rules 2017 prescribes the provisions for furnishing details of outward supplies in GSTR-1. As per this rule, if a taxpayer who is required to pay tax at the rate of 1% of the output tax liability in cash and fails to furnish his GSTR-3B in any particular month, he will not be allowed to upload his GSTR-1 of the subsequent tax period.
For example, if a registered person does not file his GSTR-3B of January 2021 and he was liable to pay tax at the rate of 1% of output tax in cash, he will not be allowed to furnish GSTR-1 of February 2021.
b) Cancellation of Registration: Rule 21 of the CGST Rules 2017 which provides for cancellation of registration has been modified to include the reference to violation of Rule 86B of the CGST Rules 2017. This means that the registration of a person can be cancelled if fails to comply with the mandatory deposit of 1% of the output tax liability in cash wherever applicable.
c) Scrutiny of returns: Scrutiny of returns can be carried out by the proper officer to verify the correctness of the return as per Section 61 of the CGST Act 2017. Thereafter, the discrepancies are communicated to the taxpayer for seeking explanation. Non-payment of mandatory 1% cash element can attract the Department’s attention through this section. After this process, if the Department does not find the explanation of the registered person to be satisfactory, they may proceed for Department Audit under Section 65 or Special Audit under Section 66 or the operations of inspection, search and seizure under Section 67. They may also issue showcause notice for determination of tax dues under Section 73 or 74 which has discussed in detail below.
d) Demand proceedings u/s 73 or 74: Non-compliance with the mandatory requirement of payment of 1% tax liability in cash for the applicable cases amounts to incorrect utilization of input tax credit. As per Section 73 or 74, where there is wrong utilization of input tax credit, the Department can proceed to determine such amount and require its payment along with interest and penalty. Ofcourse purpose of Section 73 and 74 are different with the intention of taxpayer (fraud, wilful misstatement or suppression of facts) separating the two.
Having said this, it may be argued in such a situation, there was no avoidance of any tax liability. Hence, there is no amount payable to the government. Thereby, there cannot be any question of any tax liability or interest or penalty payable on the contravention of this provision. At most, the Department can levy penalty under Section 125 which is the residuary provision for contravention of any of the provisions of the Act or rules. In this section, the maximum penalty prescribed is Rs. 25,000 under the CGST Act 2017.
Though it may seem like Rule 86B is to severely dampen the ease of doing business, the intent behind the notification of the said provision should not be obscured. It is to catch hold of persons issuing fake invoices and are ‘fly by night’ operators. Most of the unscrupulous taxpayers and a handful of genuine taxpayers would be covered within the ambit of this rule. Any genuine taxpayer getting covered by this provision and facing a cash crunch while making payment of GST in cash should make an application to the jurisdictional Commissioner for removal of the restriction of Rule 86B on him.