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New Rule 86B under GST


The Central Government has announced a new rule in CGST rules 2017; rule 86B provides restrictions on the use of Input Tax Credit to discharge the output liability. This rule shall be applied from 1st January 2021 and has an over-riding effect on other regulations. It claims that the registered person shall not use the sum accessible in credit ledger to discharge his liability towards output tax over 90% of such tax liability. If the worth of taxable supply is other than exempt supply and zero-rated supply, in a month exceeds 50 lakh rupees.

ITC utilization allowed before rule 86B
ITC plays an essential role in GST by avoiding cascading effect of taxation. The order of utilization of ITC for different components such as CGST, SGST and IGST has gone through many changes. However, the ITC accessible in the electronic credit ledger can be fully utilized for releasing the output tax liability. The new rule 86B has restricted the use of ITC balance for paying its output tax liability.

Restrictions imposed under rule 86B
Rule 86B limits the use of ITC accessible in the electronic credit ledger for releasing the output tax liability. This rule has a disregarding impact on all the other CGST rules.

This rule applies to registered persons with a taxable value of supply in a month more than Rs.50 lakh. The limit has to be examined every month before filing each return.

Restriction imposed
The applicable registered persons cannot on ITC over 99% of output tax liability. In other words, more than 99% of the output tax liability cannot be released by using the input tax credit.

Exceptions to the rule

  1. Payment of income tax of more than one lakh rupees would not be applicable in cases wherein the persons mentioned below have deposited more than Rs. 1 lakh rupees as an Income tax under Income-tax Act 1961.
  • The registered person
  • The proprietor, Karta or managing partner of the registered person or
  • Any of the two partners, whole-time directors, members of the managing committee of associations or the board of trustees of the registered persons as the case may be.
  1. If registered persons have received a refund amount of more than one lakh rupees in the preceding financial year account than the unutilized input tax credit refund of ITC towards zero-rated supplies of goods or services or rule 86B would not be applicable.
  1. Suppose a registered person under concern has discharged his liability towards output tax by electronic cash ledger for an amount over 1% cumulatively of the total output tax liability up to the said month in the current financial year. Therefore while filing the return for each month, the taxpayer has to keep track of 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.
  1. If the registered person under examine is any of the following:
  • Government department
  • Public sector undertaking
  • Local authority
  • Statutory authority

Impact of new rule 86B

  • After examining the above restrictions and exceptions introduced by rule 86B, it is clear that the above rule applies only to the large taxpayers.
  • There will be no impact on micro and small businesses, under this rule it is clearly stated that this rule is to control the issue of fake invoices to use the input tax credit to discharge the liability.
  • It restricts fraudsters from showing high turnovers without having any financial credibility.
  • Restrictions imposed by rule 86B will further increase the compliance burden for the taxpayers.

However, CBIC has clarified that 1% of the tax liability will always remain unveiled for which refund will not be granted. The new rule provides various exemptions like exporters, suppliers of inverted duty structure, and taxpayers having a footprint in the Income-tax database.

At AJSH, we assist our clients in dealing with various GST matters (GST registration, filing of GST returns, claiming refund & GST audits) by providing them adequate support and guidance from our end. If you have any questions or would like to know more about Rule 86B under GST, kindly contact us.


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