Today, I had a new client who was extremely frustrated with their accountant. The accountant was only filing GST and Income Tax returns in the name of compliance, which made the client feel that there is a significant lack of professionals who can ensure comprehensive compliance in the market. Although the client had several pending compliance issues, I would like to highlight one important compliance requirement today — Rule 86B of the CGST Act, 2017.
Rule 86B: Restrictions on the Use of Amount Available in Electronic Credit Ledger
Rule 86B was introduced under the GST regime to curb fake invoicing practices. It mandates that:
“Notwithstanding anything contained in these rules, the registered person shall not use the amount available in the electronic credit ledger to discharge their liability towards output tax in excess of ninety-nine per cent.”
Applicability of Rule 86B
Rule 86B applies where the value of taxable supplies (excluding exempt and zero-rated supplies) in a month exceeds ₹50 lakh. The limit must be verified every month before filing the return.
Exemptions from Rule 86B
The following categories of registered persons are exempt from Rule 86B:
1. Income Tax Payment Criterion:
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- The registered person or any of its key members (such as the proprietor, managing director, partners, or trustees) must have paid income tax exceeding ₹1 lakh in each of the last two financial years for which the income tax return filing deadline under Section 139(1) of the Income Tax Act, 1961 has expired.
2. Refund Criterion for Unutilised ITC (Clause i of Section 54(3)):
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- The registered person has received a refund of more than ₹1 lakh in the preceding financial year on account of unutilised input tax credit (ITC).
3. Refund Criterion for Unutilised ITC (Clause ii of Section 54(3)):
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- Similar exemption applies if the refund of more than ₹1 lakh pertains to unutilised ITC under another clause.
4. Electronic Cash Ledger Usage Criterion:
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- The registered person has discharged their output tax liability through the electronic cash ledger for an amount exceeding 1% of the total output tax liability, calculated cumulatively up to the said month in the current financial year.
5. Specific Entities Exempted:
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- Government Departments
- Public Sector Undertakings
- Local Authorities
- Statutory Bodies
Clarifications Regarding Rule 86B
1. Rule 86B Applies on a PAN Basis, Not GSTIN Basis: If a registered person has multiple branches across different states, the applicability of Rule 86B must be assessed by considering the total turnover of all GSTINs under the same PAN, rather than assessing each GSTIN individually.
2. Monthly Turnover Fluctuations: The applicability of Rule 86B must be checked every month. It is not required to cumulatively calculate the taxable supplies from previous months. Only the taxable supplies of the current month are considered to determine whether the turnover exceeds ₹50 lakh.
- If the turnover for any month does not exceed ₹50 lakh, Rule 86B is not applicable, even if the aggregate turnover during the financial year exceeds ₹6 crore.
- Conversely, if the turnover for any month exceeds ₹50 lakh, Rule 86B becomes applicable, even if the overall turnover for the financial year is below ₹6 crore.
Understanding Rule 86B and its applicability is crucial for ensuring compliance and avoiding unnecessary penalties. It is essential to evaluate compliance requirements accurately every month to stay aligned with the GST regulations.
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