1. Rule 86B (Restriction on use of Input Tax Credit for discharging the output liability) has been inserted into CGST Rules, 2017 vide notification no. 94/2020-Central Tax Dated 22nd December 2020 (Central Goods and Services Tax (Fourteenth Amendment) Rules, 2020, to be implemented w.e.f.1st January, 2021. Announced at midnight, nonetheless.
2. This rule basically says that if the taxpayer’s taxable turnover exceeds above Rs.50,00,000/- in a given month, then in that month, the taxpayer is required to pay 1% of output liability of such taxable turnover by cash ledger i.e. ITC is restricted to 99% even though taxpayer may have sufficient balance in his credit ledger.
3. This has generally been considered a bad move and has made many tax professionals and taxpayers, including the author of this article, outraged at the audacity of the Government to bring out such a drastic change in GST Laws which may potentially affect huge section of taxpayers.
4. Primary stated objective of bringing out this Rule is to curb fake invoices menace which has been plaguing the entire GST ecosystem while the Government seems like a mute spectator, till now.
5. Now, I have been doing GST compliances of over 150 of my clients, and today morning, unable to decide which compliance to take up and to avoid the negative energy floating all around due to reluctance of our Hon. Finance Minister to extend due dates in timely manner, I thought why not make my clients aware of the storm they are going to face, in coming months, due to this newly inserted Rule 86B.
6. Hence, I embarked upon drafting a write-up to be forwarded to my clients to inform them about this newly inserted Rule 86B.
7. While drafting the said write up, I came to the part where I had to explain the instances where this Rule will not be applicable as provided in proviso (a) to (d) of the said Rule 86B. Suddenly, a light bulb popped up in my little brain.
8. And, I did the math and found out that,
- 70% of my clients are small taxpayers and their turnover in a given month will never exceed Rs.50,00,000/-
- Remaining 30% Taxpayers whose turnover is likely to exceed Rs.50,00,000/- in a month,
- Have either themselves or their partners/directors have paid Income Tax in excess of Rs.1,00,000/- in two preceding years, or, (around 22% of my Clients fall under this category)
- Are engaged in Export under LUT and they have claimed GST refund in excess of Rs.1,00,000/- in preceding year, or, (around 1% of my Clients fall under this category)
- Are engaged in business which has Inverted Rate Structure and they have claimed GST refund in excess of Rs.1,00,000/- in preceding year, or, (around 7% of my Clients fall under this category)
- Needless to say, I was pleasantly surprised to know that not a single taxpayer whose GST compliances are done by me, will be affected by Rule 86B.
- Interestingly enough, I didn’t even have to check applicability of proviso (d) of the Rule 86B, which states that restriction under this Rule shall not apply where – 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.
9. Curious by the above outcome, I asked myself, where this Rule is likely to be applicable? And I could identify following instances:
- Annual taxable turnover is in excess of 6 Crores, i.e. All 12 months taxable turnover exceeding 50 Lacs, AND not engaged in Export under LUT/Inverted Supply, AND taxpayer itself or its partners/directors not paying Income Tax in excess of Rs.1,00,000/- AND has not paid at least 1% of the cumulative total output liability upto a given month through cash ledger.
- In my honest opinion, not many taxpayers would fall under this category as they would ideally be discharging 1% or more of their output liability by cash ledger. Having said this, this category of taxpayers are justified to have been subjected to provisions of Rule 86B. If this category of taxpayers are either not paying 1% of its GST liability by cash ledger or not paying Rs.1,00,000/- as income tax on back of taxable turnover of over Rs.6 Crores, then prima facie it raises suspicion and subjecting this category of taxpayers to Rule 86B will not be a bad idea.
- However, certain genuine taxpayers falling under this category are likely to hit by this Rule, e.g.
- 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.
- Occasional monthly taxable turnover exceeding 50 Lacs but not all months’ taxable turnover exceeding 50 Lacs, AND not engaged in Export under LUT/Inverted Supply, AND taxpayer itself or its partners/directors not paying Income Tax in excess of Rs.1,00,000/- AND has not paid at least 1% of the cumulative total output liability upto a given month through cash ledger.
- In my honest opinion, not many taxpayers would fall under this category as they would ideally be discharging 1% or more of their output liability by cash ledger. Having said this, Taxpayers covered under this category would ideally be engaged in (a) Any seasonal commodity business, (b) Business of Contractors where Running Invoices are issued, (c) Businesses where instance of levy arises very few times in a year e.g. CAs who issue tax invoices in Sep/Oct after completing the service of audit/other filings, (d) Annual Maintenance Contracts business etc.
- Taxpayers covered in this category would be mainly service providers. And ideally, ITC available to them would be in any way very scarce and they would have already been discharging their GST liability by cash ledger, if not more, then atleast 1% of their output liability.
- However any taxpayer covered in this category has access to genuine ITC and has been subjected to the provisions of this Rule then also the effect would be very minimal at Rs.9,000/- in incremental investment in working capital. (Considering 50 Lacs @ 18% GST = 9 Lacs Output Liability @ 1% = Rs.9,000/-). Also Rs.9,000/- paid through cash ledger would count as discharging the output liability through cash ledger in any subsequent month in which taxable turnover exceeds 50 Lacs.
10. It is well understood concept under GST regime, that the taxpayer who consistently has credit balance in its credit ledger, even after discharging its output liability on a regular basis, is a taxpayer, who is either-
- Involved in Export without payment of Tax, or,
- Engaged in business where inverted rate structure exists, or,
- Has set up a new business and has high ITC due to investment in capital goods, or,
- Engaged in exclusively exempted supply and has erroneously availed ITC on its input, or,
- Engaged in exempted as well as taxable supply and has failed to reverse pro rata credit on exempted outward supply
Though this list may not be exhaustive, it will cover over 99.50% of the taxpayers, in my honest opinion.
11. Another kind of taxpayer, apart from those mentioned in 10 above, whose credit ledger is always in green, even after discharging its output liability on a regular basis, is a Criminal. He never wants to pay GST by cash ledger and is always on a hunt to get his hands on fake invoices to save do paisa. Unknown to this criminal, due to his demand a whole new business has taken a shape to provide fake invoices. This menace of fake invoices has not only impacted future cash inflows for Government, it has succeeded in siphoning off with refunds of thousands of crores with the help of those fake invoices. So obviously and rightly so, the Government has to turn its primary focus to curb fake invoices menace, since last one year.
12. Let’s ask following questions:
- Is the Government justified in bringing this Rule to curb fake invoices? YES
- Is this change confirming to the overall spirit of the GST regime? NO
- Is this Rule going to affect genuine taxpayers? NOT LIKELY
- Is this Rule going to help in curbing fake invoices menace? TO SOME EXTENT
- Will this be challenged in Courts? ALMOST DEFINITELY
- Will the courts scrap this Rule? MAYBE
13. Then I also asked myself why it is that all the tax professionals and taxpayers, including myself, went on the social media to demand immediate answers and demand for rollback from the Government which started from the morning of 23rd of December and has not died down yet?
14. The answer to that is, we are very angry. We are angry that the Government had promised the moon when the GST was being implemented and GST right now is not what we thought it would be. We are angry that the Government has been changing GST laws every other week. We are angry that logic seems to have died down in some of the newly amended GST laws. We are angry that the Government seems to have been treating every taxpayer as We are angry that we are unable to finish the GST compliances in timely manner and it has been becoming very hard day by day to keep up with it.
15. What is the way forward for us, the tax professionals?
- To understand Government’s point of view that they are trying to curb fake invoices menace and provide our feedback to them about genuine hardships that the genuine taxpayers are about to face due to any amendment
- Educate our clients and explain them amendments being bought in and to restrict our role to do compliance work and let the clients raise any issues that they may face due to any law
- Shed out consistently non-compliant clients and focus on consistently compliant clients
- Clearly convey the scope of our work with Clients. e.g. Who will perform the monthly reconciliations with 2A/2B? How many days it will take to file a return once the data is sent to us?
16. What is the way forward for the Government?
- Don’t be adamant or rather don’t give an impression of being adamant, just engage with the trade bodies / tax professionals a little more and be open to constructive feedback once in a while.
17. What is the way forward for the Taxpayers?
- Don’t indulge in fake invoices
- Ensure timely compliance
- Apprise themselves with the laws
- Shed out consistently non-compliant suppliers
- Engage with trade bodies to collectively take up any issues with the Government
18. I think that even though GST as of today is not what it was promised, after one year it is going to be much, much better. In two years, it is going to get even better. After five years I would be surprised if our country’s GST system is not the best in the world. It is destined to be the best, because it has got best minds working on it, on either side of the aisle.