Summary: Introduced under the Central Goods and Services Tax (CGST) Rules, 2017 through Notification No. 94/2020, Rule 86B came into effect on January 1, 2021, to counter fraudulent practices in the GST system, particularly the misuse of Input Tax Credit (ITC). This rule mandates that taxpayers with a taxable turnover exceeding ₹50 lakhs must pay at least 1% of their GST liability in cash, even if they have an available ITC balance. The remaining liability can be paid using ITC. Several exceptions apply, including for taxpayers who have paid income tax exceeding ₹1 lakh in the last two years, received substantial ITC refunds, or paid more than 1% of their liability in cash in previous months. Government entities and PSUs are exempt from this rule. The rule aims to curb tax evasion by preventing fake invoicing and circular trading, while ensuring consistent revenue flow to the government. Although it helps reduce fraud, it adds operational strain on businesses, especially those with limited cash flow. Non-compliance can lead to penalties, interest, and possible suspension of GST registration. Therefore, taxpayers must carefully assess their turnover and compliance history to avoid penalties and ensure smooth business operations under GST.
Introduction:-
Rule 86B is an anti-evasion measure targeting fraudulent practices involving ITC misuse. While it introduces stricter compliance, the rule is balanced with exceptions for genuine taxpayers. Businesses must analyze their turnover, compliance history, and operational requirements to adhere effectively to the rule.
Rule 86B was introduced in the Central Goods and Services Tax Rules, 2017 through Notification No. 94/2020 – Central Tax, dated 22nd December 2020. It became effective from 1st January 2021. Here are the complete details regarding Rule 86B:
Purpose and Introduction
Rule 86B imposes restrictions on the use of the Input Tax Credit (ITC) for discharging GST liability. It mandates that taxpayers must use a minimum of 1% of their tax liability to be paid in cash, irrespective of the ITC balance available in their electronic credit ledger. This rule was introduced to curb fraudulent activities, such as fake invoicing and circular trading.
Key Provisions of Rule 86B
1. Applicability Threshold: Applicable to taxpayers whose taxable turnover (excluding exempt supply and zero-rated supply) exceeds ₹50 lakhs in a given tax period.
2. Restriction on ITC Utilization: A taxpayer cannot use ITC to discharge more than 99% of their tax liability. At least 1% of the tax liability must be paid through cash.
3. Exclusions from Taxable Turnover: The threshold excludes exempt and zero-rated supplies.
Exceptions to Rule 86B
Taxpayers are exempted from the 1% cash payment requirement if they meet any of the following conditions:
1. Income Tax Payment: The registered person or its proprietor, partner, managing director, or any of its authorized signatories has paid income tax exceeding ₹1 lakh in each of the last two financial years.
2. Refunds: If the registered person has received a refund exceeding ₹1 lakh in the previous financial year for unutilized ITC on account of:
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- Zero-rated supplies without payment of tax, or
- An inverted duty structure.
3. Turnover and Cash Ledger Utilization: The registered person has discharged more than 1% of their total tax liability in cash cumulatively up to the said month in the current financial year.
4. Government Entities: Rule 86B does not apply to government departments, public sector undertakings (PSUs), statutory bodies, and local authorities.
What is Rule 86B 1% in Cash?
The 1% in cash rule refers to the stipulation that at least 1% of the GST liability must be paid through cash, even if the taxpayer has ITC available. For example:
- A taxpayer with a GST liability of ₹10 lakhs must pay at least ₹10,000 in cash and can use ITC for the remaining ₹9.9 lakhs.
Illustration
- Taxpayer A has a monthly taxable turnover of ₹60 lakhs and a total GST liability of ₹4.8 lakhs.
- Under Rule 86B:
- At least ₹4,800 (1% of ₹4.8 lakhs) must be paid in cash.
- The remaining ₹4,75,200 can be discharged using ITC.
Objectives of Rule 86B
1. Curb Tax Evasion: Deters entities engaged in creating fake invoices and fraudulent ITC claims.
2. Ensure Revenue Flow: Promotes consistent cash flow to the government.
3. Promote Genuine Transactions: Encourages compliance with GST provisions.
Impacts of Rule 86B
1. For Taxpayers:
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- Increased compliance requirements.
- Operational and financial burden for businesses with tight cash flow.
2. For the Government:
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- Reduces tax evasion through ITC misuse.
- Enhances revenue collection.
Penalties for Non-Compliance
Failure to comply with Rule 86B can result in:
- Interest and Penalties: On the amount improperly set off using ITC.
- Cancellation or Suspension of GST Registration: Under applicable rules.
- Legal Action: As per the provisions of the CGST Act for misutilization of ITC
Conclusion
Rule 86B is a significant regulatory measure to strengthen compliance and curb tax evasion in the GST framework. While it ensures a steady revenue stream for the government and reduces fraud, it also increases the compliance burden on businesses. Taxpayers should assess their eligibility, understand exceptions, and ensure adherence to avoid penalties and maintain smooth operations.
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