Restrictions and Exceptions to Rule 86B of CGST Rules (payment of 1% GST liability through Electronic Cash Ledger)

by | Jan 27, 2021 | Outlook

The Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) underwent several changes effective from January 1, 2021. One important amendment was insertion of Rule 86B which mandates every taxpayer to pay 1% of GST liability through Electronic Cash Ledger. This amendment has created confusion amongst many taxpayers and created a perception that the restriction applies in all scenarios. This Outlook intends to present the salient features of Rule 86B and throw light upon exceptions carved out for the same. 

Background 

Rule 86B stipulates that registered person making taxable supply of value more than Rs. 50 Lakhs in a month, excluding exempt supply and zero-rated supply, cannot utilize Input Tax Credit (‘ITC’) available in Electronic Credit Ledger in excess of 99 percent. This restriction is not absolute and Rule 86B inter-alia carves out following exceptions where this restriction shall not apply:

  • Taxpayer or whose Managing Director, any two Wholetime Directors or Partners (as the case may be) have paid Income Tax exceeding Rs. 1 Lakh in preceding 2 Financial Years (FYs);
  • Taxpayer who received refund of unutilized ITC exceeding Rs. 1 Lakh in preceding FY;
  • Taxpayer who discharged GST liability exceeding 1 percent of total liability of FY (when applied cumulatively) in cash; and
  • Government Department, Public Sector Undertaking, Local Authority or Statutory Body.

Implications 

This provision intends to curb fraudulent taxpayers involved in issuance of fake invoices to facilitate claim of ITC. The exceptions are carved out to ensure that this restriction does not apply to genuine taxpayers. Some examples to illustrate possible exceptions are tabulated below:

Scenario

Particulars

Applicability (Yes / No)

1

ABC makes outward supply of Rs. 50 lakhs and has accumulated ITC due to inverted-tax structure. It procures inputs chargeable at 18 percent GST and makes output supply at 5 percent GST. It claims refund of ITC on account of inverted-tax structure.

 

 

No

If taxpayer claimed refund of ITC more than Rs.1 Lakh in last FY

2

ABC is exporter of goods. It makes export of Rs. 50 lakhs and did not pay any GST in cash in last FY. It claims refund of accumulated ITC on account of zero-rated supply.

3

ABC is loss making entity and did not pay any GST in cash in past. It has six whole time directors, two of which paid Rs.3 Lakhs as Income Tax in last 3 FYs.

No

Since 2 whole time directors paid Income Tax exceeding Rs.1 Lakh in last 2 FYs

4

ABC was incorporated as Private Limited Company in FY 2019-20 and had turnover of Rs. 6 Crore in that FY. It did not pay any GST in cash due to ITC accumulated on capital goods. Managing Director of ABC has been paying substantial Income Tax in past several years.

No

If Managing Director paid Income Tax of more than Rs.1 Lakh in last 2 FYs

CBIC vide its tweets dated December 26, 2020, also clarified the apprehensions on Rule 86B as under:

  • This Rule applies only to taxpayers having monthly turnover of Rs. 50 Lakhs or more and not to Small and Medium businesses. This Rule will apply only to 0.5 percent of taxpayers out of total taxpayer base of 1.2 crore.
  • GST payment of 1 percent needs to be calculated on monthly liability and not entire turnover.
  • This Rule will effectively apply only to suspicious taxpayers who intend to evade taxes.

Basis above, taxpayers can analyze applicability of this provision to their business and in particular, exceptions stated above.

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