GST Rule 86B – An Analysis

The government introduced GST explaining that it is good and simple tax to eradicate the cascading effect of various indirect tax legislations in the country, but after introduction of GST, the government took various measures to curb the fake ITC frauds but while doing so government did not even bother about what is the impact of such measurers to the innocent and regular tax payers. One such rule introduced in GST law is Rule 86B.

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

Before going into the deep dive of Rule 86B, I hereby would like to mention entire rule 86B for your reference.

86B. Restrictions on use of amount available in electronic credit ledger:- 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 ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –

(a) 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

(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of subsection (3) of section 54; or

(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or

(d) 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; or

(e) the registered person is –

(i) Government Department; or

(ii) a Public Sector Undertaking; or

(iii) a local authority;or

(iv) a statutory body:

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 of GST Rule 86B:

1. The rule starts with non-obstante clause, which means it overrides all the existing rules as on the date of applicability of this rule, the date from which this rule came into effect is from 01-01-2021.

2. The rule is applicable in case where the taxable supplies in a month exceeds rupees fifty lakh rupees. However taxable supplies does not include exempt supplies and zero rated supplies. [Taxable supplies = total taxable supplies – (exempt supplies + zero rate supplies)].

3. If the turnover of taxable supplies in a particular month exceeds fifty lakhs as mentioned above, then ninety nine percent output tax can be paid using the input tax credit available in electronic credit ledger.

4. The exceptions to the above rule are as follows:

a. Where regular tax payer within normal time limits under income tax act, if income tax paid is rupees one lakh rupees in the each of last two financial years.

b. Also if 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 paid income tax of one lakh rupees in the each of last two financial years.

c. If the said person received more than one lakh rupees as refund in the preceding financial year under the provisions of either clause (i) of first proviso of subsection (3) of section 54 or under clause (ii) of first proviso of subsection (3) of section 54

d. If the person cumulatively including current month discharged his output tax liability in cash which is more than 1% of total output tax liability.

e. The registered person is

i. Government Department; or

ii. a Public Sector Undertaking; or

iii. a local authority; or

iv. a statutory body

Examples where rule 86B impacting regular genuine tax payers.

The impact of Rule 86B on a dealer who is dealing in telephone/mobile recharge dealer who has margin of 0.5%, the same is well explained with the following example.

Month	Purchase	Input tax credit	Opening Stock	Cost of sales	Closing Stock
Jan-2021	1,69,15,000	30,44,700	–	1,59,15,000	10,00,000
Feb-2021	1,79,10,000	32,23,800	10,00,000	1,79,10,000	10,00,000
Mar-2021	2,28,85,000	41,19,300	10,00,000	2,28,85,000	10,00,000
Total	5,77,10,000	1,03,87,800	10,00,000	5,67,10,000	10,00,000

Table 1.1

Month	Sale price	Output tax	99% using ITC	1% using cash	Balance ITC	Profit of the assessee
Jan-2021	1,59,94,975	28,79,095	28,50,305	28,791	1,94,395	79,975
Feb-2021	1,80,00,000	32,40,000	32,07,600	32,400	2,10,595	90,000
Mar-2021	2,30,00,000	41,40,000	40,98,600	41,400	2,31,295	1,15,000
Total	5,69,94,975	1,02,59,095	1,01,56,505	1,02,591	2,31,295	2,84,975

Table 1.2

Profit and Loss Account for the period Jan-21 to March 21
Particulars	Amount	Particulars	Amount
Opening Stock	–	Sales	5,69,94,975
Purchases	5,77,10,000	Closing Stock	10,00,000
Profit	2,84,975
	5,79,94,975		10,00,000

Table 1.3

In the above example assume the tax payer is an individual and the next financial year that is FY 2021-22 does almost same business for the whole year, then multiply the profits with 4 for four quarters which amounts to Rs. 11,39,900. After considering various deductions the taxpayers’ total income liable to tax will be around Rs. 9,00,000 for which the tax liability will be Rs. 95,275/-.

Rule 86B will create additional working capital burden by making necessary payment in cash of Rs. 1,02,591/- and Rs. 4,10,364/- to the tax payer for the FY 2020-21 & FY 2021-22 respectively.

1. Similar examples can be taken on various businesses wherein the margin itself is less than percentage or various categories of traders wherein the margin is less than 1% or where the stock turnover is ratio is low.

2. Similar examples can also be taken in case of tax payers where the tax payers is applying penetration strategy to enter into new markets or while introducing new products, in such cases tax should not hamper the business plans, because the tax authorities wants to curb the fake ITC, which should have been dealt otherwise in better means rather than imposing restrictions on utilization of ITC.

Interpretational issues due to vague drafting of Rule 86B

1. Payment of more than rupees one lakh rupees as income tax in the preceding two financial years either by the registered tax payer or karta or managing director etc., mentioned in the rule 63B as an exception to the rule will not work in cases where the registered tax payer is into lossess or in case where registered tax payer is not subject taxes due to deductions or exemption from taxes under the provisions of direct tax laws. For example tax payer who is in SEZ will not be required to pay taxes up to 10 years. This is clearly not in mind of the parliament/CBIC while drafting such rules.

2. any of its two partners: any of its two partners used in the proviso to Rule 86B as an exception to application of such rule when any of its two partners pays income tax of rupees one lakh in each of the two preceding FYs. However here comes issue that where partners are partners in more than one firm and due to that one of the two partners paid more than one lakh rupees as income tax in the preceding two FYs, will that be considered as an exception while applying Rule 86B or as the partners have not paid income tax due to being partners in this firm but paid due to the fact that they are also partners in another firm, therefore rule 86B will be still made applicable in such a cases.

3. Whether similar analogy of any two as discussed above will be made applicable in case of whole time directors, trustees etc.,

4. As per the provisions of Section 54 read with relevant rules refund application can be made monthly, more than a month or quarterly or half yearly or in any combination including yearly. Generally, in most of the cases the refund applications are applied annually, in this scenario we would like to discuss clause (b) & (c) of first proviso of Rule 86B. as the word mentioned in these two clauses are of not the words of refunds applied but words refunds received. The phrase extracted “received a refund amount of more than one lakh rupees in the preceding financial year”. As it is clearly mentioned in the clauses that the refund should be received, words used were not of refund applied or approved or refund sanctioned. It is clear that even if refund applied and approved and delayed in terms of payment or refunds are applied in the subsequent financial year the chances of exceptions to rule 86B giving relief will not be there. Therefore, one should be very clear when should you receive your refund, otherwise rule 86B will be applied, is it what department intended?

FAQs

1. Whether payment of rupees one lakh payment of income tax in the proviso mentioned includes tax paid as advance tax and self-assessment tax only or will it include TDS.

Tax paid as per the income tax Act, 1961 includes tax paid as TDS, Advance tax and self-assessment tax.

Authored by : Indirect tax team at L V M & Associates