GST Rule 86B: Analysis of Rule restricting the use of ITC in excess of 99% of the Output Tax liability (Read Notification)

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.) The rule is effective from 1st January 2021. Rule 86B has imposed restriction on utilization of on ITC (Input Tax Credit) available in electronic credit ledger. As per Rule 86B CGST Rules, A registered persons cannot use Input Tax Credit in excess of 99% (ninety-nine percent) of output tax liability. This means 1% of Output liability is to be paid in cash. This limitation is applicable where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees.

Analysis of New Rule 86B of CGST Rules

  1. Rule 86B has an overriding impact on any other rule– This rule starts with the non-obstante clause and has an overriding impact on any other provision of the Rules.
  2. Rule 86B provides a restriction on the use of ITC while discharging output liability-This rule provides a restriction on the registered person on use of amount available in the electronic credit ledger to discharge liability towards output tax.
  3. Applicable on registered persons having value of taxable supply (other than exempt supply and zero-rated supply), in a month exceeding fifty lakh rupees– This rule is applicable on the registered person whose value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees. This limit is not be checked with respect to the preceding financial year but for each month for which return is being filed. Therefore, in cases wherein turnover of taxable supply would be less than 50 Lakh then this restriction would not be applicable and supposedly in the subsequent month, if the turnover exceeds 50 Lakh, then restriction would have to be checked.
  4. Output tax liability cannot be discharged in excess of 99% by utilizing Input Tax credit-The said registered persons cannot use Input Tax Credit in excess of ninety-nine percent of output tax liability.

Non Applicability of Rule 86B

  1. Payment of Income Tax of more than one lakh rupees– Rule 86B would not be applicable in cases wherein the persons mentioned hereinbelow have deposited an amount of more than one lakh rupees as income tax
  • The said registered person or
  • The proprietor or Karta or the managing director of the registered person or
  • Any of the two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees of the registered person, as the case may be,
  • The eligibility check would be made in each of the last two financial years for which the time limit to file return of income under section 139(1) of the said Act has expired.
  1. Refund of ITC towards Zero Rated Supplies of Goods or services or both– Rule 86B would not be applicable in cases wherein 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 due to zero-rated supplies made without payment of tax. It should be noted that the refund should have been received in the preceding financial year.
  2. Refund of Input Tax Credit due to Inverted Duty Structure– 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 Inverted duty structure. It should be noted that the refund should have been received in the preceding financial year.
  3. Cumulative discharge of tax liability of more than 1% during the financial year– Restriction in Rule 86B is not applicable wherein cumulatively upto the said month in the current financial year 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. Therefore, while filing returns for each month, the taxpayer now has to make keep track that whether his cumulative discharge of tax liability of output tax through electronic cash ledger is more than 1% up to the month of filing of return.
  4. Restriction under Rule 86B is not applicable to the following registered person-
  • Government Department; or
  • a Public Sector Undertaking; or
  • a local authority;or
  • a statutory body.

Rule 86B empowers the Commissioner or an officer authorised by him in this behalf to remove the said restriction after such verifications and such safeguards as he may deem fit.

Rule 86B of CGST Rule 2017 Notification

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