A Comprehensive Guide for Rule 86B

The concept of Input Tax Credit holds a significant importance within the framework of GST as it effectively mitigates the cascading impact of taxation. The entire ITC available in the electronic credit ledger remains eligible for the complete offsetting of the output tax liability. However, the enforcement of Rule 86B has imposed limitations on the utilization of ITC balance available in electronic credit ledger for discharging the output tax liability. In this article, we will thoroughly explore the limitations enforced by Rule 86B.

As per sub section 4 of section 49 of CGST Act 2017 the amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions and within such time as may be prescribed. Rule 86A of CGST Rules 2017 prescribes the conditions of use of amount available in electronic credit ledger. Further, Rule 86B was inserted by The Central Board of Indirect Taxes and Customs (CBIC) vide Notification number 94/2020 dated 22nd December, 2020. Such Rule 86B is made effective from 1st January 2021. Said Rule 86B prescribes the restrictions on use of amount available in electronic credit ledger. For purpose of detailed analysis, the said rule 86B is laid down as follows;

“Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where '
(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or

(b) 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 clause (i) of first proviso of subsection (3) of section 54; or

(c) 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 clause (ii) of first proviso of subsection (3) of section 54; or

(d) 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; or

(e) the registered person is '
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii) a local authority; or
(iv) a statutory body:

Provided further that the Commissioner or an officer authorized by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.”

From the above, it can be stated that the Rule 86B has an overriding impact on all the other CGST Rules and said rule restricts the use of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule is applicable to registered persons having taxable value of supply (other than exempt supply and zero-rated supply) in a month which is more than Rs.50 lakhs. Hence to ensure the applicability of Rule 86B, it is necessary to check the turnover limit of Rs. 50 lakhs every month before filing the return (GSTR-3B) of every month. For example, if the value of taxable supplies > Rs. 50 Lakhs in the month of December, then the provision of Rule 86B would be applicable. However, if in the next month i.e., January, such value of taxable supply does not exceeds Rs. 50 Lakhs then the provision of this rule would be not applicable and if the rule 86B gets triggered then the registered persons cannot use ITC in excess of 99% of output tax liability. In other words, even if the credit is available in the electronic credit ledger the registered person has to
pay 1% tax in cash.

Let us understand the implication of Rule 86B of CGST Rules 2017 with the help of an example:
Suppose a registered person Mr. A has taxable value of supply in the month of March is Rs. 70 lakhs, then due to applicability of Rule 86B in such case while filing GSTR-3B of March,  Mr. A can utilise ITC available in his credit ledger only upto to 99% and has to pay 1% of Rs.70 lakhs i.e.,Rs. 7,000 in cash. Otherwise there would be a violation of Rule 86B.

However, Rule 86B also contains some exceptions as mentioned above. So, let us summarised those exceptions. The rule 86B would not be apply where
(i) The taxpayer or the proprietor or karta or managing director or any of its two partners, whole-time directors have paid income tax in each of the last two financial years more than Rs. 1,00,000; or
(ii) In last year the taxpayer has claimed the refund of unutilised ITC due to export done on LUT basis & amount of such refund exceeds Rs. 1,00,000; or
(iii) In last year the taxpayer has claimed the refund of unutilised ITC due to inverted duty structure & amount of such refund exceeds Rs. 1,00,000; or
(iv) the registered person has paid the GST in cash for an amount which is in excess of 1% of the total output tax liability; or
(v) the registered person is a Government Department, PSU, local authority, statutory body.

Let us analyse these exceptions with the help of some examples;
(i) A Partnership firm is registered under GST, out of his two partners, one partner has paid income tax of more than 1 lakh in last two consecutive financial year (i.e. FY 19-20 & FY 20-21) and another partner has paid income tax of more than 1 lakh in only one Financial year (i.e. FY 19-20) and For FY 20-21 he has paid income tax less than 1 lakh. In this case, whether Rule 86B would be applicable in this case?

In this case, it is to be noted that as the first exception to Rule 86B, any of two partners should have paid the income tax in each of the last two financial years more than Rs. 1,00,000. Since in the given case only one partner has paid the income tax more than Rs.1,00,000. Accordingly, it would not be covered under exception to Rule 86B and the said rule would be applicable in this case.

(ii) Mr. A has exported the goods on payment of IGST as well as on the basis of LUT and claimed the refund of Rs.1,52,000 from the department in the last financial year. Out of which the refund pf Rs. 90,000/- has been received due to export done on payment basis and remaining amount i.e,  62,000/- is claimed as refund of ITC due to export on LUT basis. Whether such person would be covered under exeption to Rule 86B?

It is clearly stated in the second exception to Rule 86B that in last year the person should have received the refund in excees of Rs.1,00,00 of accumulated ITC due to export done on LUT basis. Accordingly, this case would not be covered under exception to Rule 86B and the said rule would be applicable in this case.

(iii) Suppose Mr. X is making taxable supplies at the rate of 5% & 12% but all the purchases done by Mr. X at the rate of 18%. Due to this, the balance of ITC has been accumulated and he has filed an application for refund under invertered duty structure and received the refund of Rs. 1,20,000 in last year. Whether Mr. X would be covered under exception to Rule 86B?

In the third exception to rule 86B it is being stated that in the last year the person should have received a refund in excees of Rs. 1,00,000, due to invereted duty structure. Since in the given case Mr. X has received a refund of Rs.1,20,000 in the last year due to inverted duty structure, hence this case would be covered under exception to Rule 86B and the said rule would not be applicable in this case.

(iv) Let say in the financial year 2022-2023, up to September 2022, the output tax liability comes to Rs 15 lakhs and Mr. Y has deposited more than Rs 15,000 in cash for discharging output tax liability up to September 2022. Whether such Rule is applicable for October 2022 or not?

In this regard it is to be noted that in the fourth exception to Rule 86B it is stated that Rule 86B would not be applicable if 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. Since in the given case Mr. Y has paid the output tax more than 1% in cash upto September 2022, hence it would covered under this exception and Rule 86B would not be applicable in this case.

From the above examples we have made detailed discussion about Rule 86B and the exceptions to Rule 86B and no scope of confusion has been left now.

Conclusion: Rule 86B of CGST Rules imposes the restrictions on use of amount available in electronic credit ledger and once the Rule 86B is applied then the taxpayer has to deposit atleast 1% of output tax liability in cash even if the amount is available in the credit ledger.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.