Electronic Credit Ledger: Rule 86B Restrictions

1. Introduction :-

Introduced under the Central Goods and Services Tax (CGST) Rules, 2017 through Notification No. 94/2020, dated 22nd December, 2020, Rule 86B came into effect from 1^st January, 2021, to counter fraudulent practices in the GST system, particularly the misuse of Input Tax Credit (ITC).

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 other than exempt supply and zero-rated supply, in a month exceeds 50 lakh rupees.

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.

2. Interpretation of Law (Rule 86B) :-

A. 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 ledger.

B. Applicable to taxpayers whose turnover (excluding exempt supply and zero-rated supply) exceeds ₹50 lakhs in a month.

C. The threshold turnover limits excludes exempt and zero-rated supplies.

This rule primarily impacts large businesses with high turnovers. Small businesses with a monthly taxable turnover below Rs. 50 lakh are not affected by the restrictions on ITC utilization. While the rule might increase the cash outflow for some large businesses due to 1% discharged in cash, it plays a vital role in plugging loopholes and ensuring a more robust and transparent tax system.

3. Exception (when Rule 86B does not applicable) :-

A. Income Tax Payment Criteria:

• If the registered person (or Proprietor/ Karta/ Managing Director/ Partner/ Whole-time Director) has paid Income Tax exceeding ₹1 lakh in each of the last two financial years.

 B. Refund Criteria:

• If the taxpayer has received a refund of more than ₹1 lakh in the previous financial year on account of:
  • Unutilized ITC from zero-rated supplies without payment of tax (exports or SEZ supplies under LUT), or
  • Inverted duty structure (rate of tax on inputs higher than outputs).

C. Cash Payment Criteria:

• If the taxpayer has already cumulatively paid >1% of output tax liability in cash up to the said month in the current financial year.

D. Exempted Entities:

• The restriction will not apply to:
  • Government Departments
  • Public Sector Undertakings (PSUs)
  • Local Authorities
  • Statutory Bodies

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.]

4. Explanation of 1% paid in cash under Rule 86B :-

The 1% paid in cash 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:

• Taxpayer A has a monthly taxable turnover of ₹75 lakhs and a total GST liability of ₹13.50 lakhs.
• Under Rule 86B:
  • At least ₹13,500 (1% of ₹13.50 lakhs) must be paid in cash.
  • The remaining ₹13,36,500 can be discharged using ITC.

5. Objectives of Rule 86B :-

A. Curb Tax Evasion: Deters entities engaged in creating fake invoices and fraudulent ITC claims

B. Promotes consistent cash flow to the government

C. Encourages compliance with GST

D. To curb circular trading and tax evasion

6. Impacts of Rule 86B :-

A. For Taxpayers:

• • Increased compliance requirements.
  • Operational and financial burden for businesses with tight cash flow.

B. For the Government:

• • Reduces tax evasion through ITC misuse.
  • Enhances revenue collection.

C. Penalties for Non-Compliance

• • Interest and Penalties: On the amount improperly set off using ITC.
  • Cancellation or Suspension of GST Registration: As per Rule 21 (g)
  • Legal Action: As per the provisions of the CGST Act for misutilization of ITC

7. Conclusion :-

• Rule 86B of the CGST Act serves as a significant measure to curb tax evasion and promote a fair tax environment. By understanding its applicability, restrictions, and exceptions, businesses can ensure compliance and avoid any potential penalties. It’s advisable to consult a tax advisor for specific guidance regarding Rule 86B and its implications for your business.
• Rule 86B is a targeted move by the Government to tighten GST compliance, ensure genuine cash flow, and fight tax evasion. Although it adds a compliance burdenon large businesses, it strengthens the GST system’s integrity.

Always review turnover and ITC usage before filing GSTR-3B, and plan cash flows accordingly to stay compliant with Rule 86B.

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The author can be contacted at calokeshaggarwal52@gmail.com His mobile number is +91-8368353016.

DISCLAIMER : This publication serves as a general guide for informational purposes only. The references and content provided are for educational purposes and should not be considered as legal advice.