One of the key changes introduced by the GST in India to improve tax compliance and curbing fraud is Rule 86B under the CGST Rules, 2017. Effective from January 1, 2021, this rule restricts a registered person from utilising the Input Tax Credit (ITC) available in the electronic credit ledger for the discharge of output tax liability where the entity has substantial taxable supplies.
Prior to the introduction of Rule 86B under the GST framework, ITC utilisation was comparatively flexible, and businesses were permitted to fully offset their output tax liabilities using the ITC available in their electronic credit ledger. Through this method, taxpayers were exploiting the system by utilizing 100% of their ITC without making any cash payments. This created opportunities for bogus entities to claim ITC without conducting genuine business operations. By mandating minimum cash payment, the rule ensures that only businesses with real economic substance can fully benefit from ITC provisions. Lets delve deeper into the intricacies of Rule 86B.
Applicability
This rule applies to registered persons whose taxable value of supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a particular month.
Businesses must observe this threshold monthly, just prior to filing each return.
Restriction Imposed
This rule mandates that applicable registered persons cannot utilize ITC exceeding 99% of their total output tax liability.
In simpler terms, businesses with a monthly taxable turnover above Rs. 50 lakh are required to pay at least 1% of their output tax liability in cash. This restriction effectively limits the usage of ITC accumulated through purchases.
Exceptions to the Rule
The following type of cases are excluded from the Rule:
| Exemption Category | Requirement |
| Income Tax Payment | In case the registered person or key managerial persons, including the proprietor, karta, managing director, or partners, or Whole Time Director have paid more than Rs. 1 lakh as income tax under the Income Tax Act of 1961 in each of the two preceding years. |
| Regular Cash Payments | Output tax liability paid in cash ledger exceeding 1% cumulatively of total output tax up to the current month in the financial year |
| Government Bodies | All government departments, PSUs, local authorities and Statutory Authority. |
| Export Refunds | Refunds exceeding Rs. 1 lakh in the preceeding FY on account of export under LUT or due to Inverted Duty Structure. |
| Discretion of Commissioner | The Commissioner or authorized officials at their discretion and after due verification, remove the restriction on a case-by-case basis. |
Consequences of Non-Compliance with Rule 86B
Failing to comply with Rule 86B can lead to penalties and increased scrutiny from tax authorities. Businesses must ensure they adhere to these regulations to avoid potential legal issues.
Impact on different types of Businesses
Rule 86B will have the following impact on businesses –
- This new rule will have no impact on small-scale and micro businesses as it has a limit of 50 lakhs which applies only to large taxpayers.
- The rule will reduce the unethical business practices such as creating counterfeit invoices that are later used for creating counterfeit input tax credits. They then use these fake ITCs to discharge their output tax liabilities.
- This will also prevent fraudsters from displaying false high turnovers, which would lead to higher financial credibility.
- The restrictions in the rule will also increase the compliance burden on the taxpayers.
- Since businesses must now allocate a portion of their GST liability for cash payment, it affects their working capital requirements.
Bottom Line
The Central Government brought Rule 86B to cut down on tax evasion and stop fake invoicing. However, it has created some problems for the genuine taxpaying large scale businesses that have come under the ambit of this law. These businesses generally run on very low margins of profits due to various industrial practices. To navigate these challenges effectively, businesses need to adapt their compliance processes and maintain meticulous records of their income tax payments and GST refunds.
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For any further information or clarification, the author can be reached at cashubhikhandelwal@gmail.com.
DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.
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