ANALYSIS OF RULE 86B OF THE CGST RULES 2017 – Restriction on ITC Utilisation in Electronic Credit Ledger (ECL)

Taxability: Applicable with effect from 01.01.2021 through NN 94/2020 dtd 22nd Dec, 2020.

Applicability: Applicable on taxpayer having turnover > 50 lakhs in a month.

Provision: Taxpayers covered under this rule are liable to pay at least 1% of the total output tax liability through electronic cash ledger.

Note: Turnover here refers to the Taxable turnover excluding any exempted supply, export with or without LUT.

Note: Reverse charge payments will not be included while calculating such liability.

For e.g.: If any firm is supplying goods/services or both in a month for INR 60,00,000 having tax rate 18%, then, the liability payable through cash ledger shall be INR 60,00,000*18%*1%= INR 10800.

Non Applicability of Rule in certain cases

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

Notes:

  • Here, income tax payment shall be considered as paid even when paid through deduction of TDS. There is no requirement of payment being made only in cash (incl. bank).
  • When MAT is payable (as per section 115JB) it shall also be construed as Income Tax.
  • The government basically assumes that fake companies might not have paid income tax of more than Rs. 1,00,000/- in last 2 financial years. However, it is imperative to note that income tax of Rs. 1,00,000 would not be a big deal if a fake company is dealing in crores.
  • the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i){stating zero rated supply made without payment of tax} and clause (ii) {where rate of tax is greater than the tax rate on output}of first proviso of sub-section (3) of section 54; or
  • 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; or

Notes: –

The said % has to be applied on cumulative basis.

I.e. Tax paid through e cash ledger from start of FY till the month of return filing divided by Total output tax liability till the month of filing return

  • Where registered person is a:
    • Government authority
    • Public sector undertaking
    • Statutory bodies
    • Local authority

Who will be affected most by the Rule 86b:-

  • Genuine taxpayers whose turnover occasionally increases above INR 50 lakhs in a month even though for the rest of year, their turnover is below the INR 50 lakhs limit and since this rule states that even if turnover exceeds INR 50 lakh in a single month then they have to pay at least 1% of tax liability in cash.

Hence these taxpayers will be hit by this Rule even though their overall turnover is not much.

  • For E.g.: Those taxpayer whose sales structure depends upon seasonal demands, like electronic goods seller (their sales increases during marriage periods, or during change of seasons). During those times even though they don’t have frequent sales > 50 lakhs per month will still be liable to pay1% through cash ledger.

They will not be satisfying the conditions of exemption to the rule as well as they will not be paying any tax liability through cash ledger up to the concerned month of payment.

  • If a taxpayer has setup a new business and has incurred huge capital expenditure resulting in (a) huge ITC on capital assets and (b) business loss due to depreciation claim on those capital expenditure.
  • If a taxpayer has huge brought forward loss under Income Tax and genuinely availed ITC credit on huge inventory which now it intends to sell.
    • Query: If there are brought forwards losses which are being adjusted against the taxable, then also can it be safely assumed that the registered taxpayer has shown sufficient income to be paying tax of INR 1,00,000?
  • If a taxpayer has setup a new business and has incurred huge capital expenditure resulting in (a) huge ITC on capital assets and (b) business loss due to depreciation claim on those capital expenditure.

Whether liability of paying tax will be very huge to the genuine tax payers?

Even if the genuine taxpayers are being hit by this Rule even then the liability to pay tax through cash ledger will not be very huge and the leftover credit can be used safely against the tax liability of further periods.

For e.g. if we consider the turnover of the month to be INR 50 lakh, then maximum payable liability through cash ledger will be 5000000 * 18% * 1% = INR 9000

Is the Rule 86B really unfavorable to most of the Taxpayers?

INR 50 lakhs per month taxable turnover is a huge amount, considering which taxpayers who are paying tax on genuine basis which mostly be covered under any of the above mentioned exemptions. Those who can be affected by the said rule will with high chances be the persons who are showing the income inappropriately with few exceptional cases.

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?

The limit of Rs.100,000 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.

Can registration be cancelled on non-compliance of Rule 86b?

Yes, Rule 21 of the CGST Rules, 2017 has been accordingly amended regarding this that if provisions of Rule 86b are violated then the registration of the taxpayer can be cancelled.

Observation

On initial reading it may be depicted that Rule 86b is not in favor to the interest of taxpayers, however close understanding of the provision ensures that most of the taxpayer will not be covered in its ambit.

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