Rule 86B GST: ITC Utilization Restrictions Explained
Rule 86B GST: ITC Utilization Restrictions Explained
Mar 22, 2024
15 Mins
All About Rule 86B under GST: Restriction on Utilization of ITC in Electronic Credit Ledger
The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new rule, 86B, through notification number 94/2020 dated December 22, 2020. The effective date for Rule 86B is January 1, 2021.
1. ITC cannot be claimed if it is restricted in GSTR-2B, as stated in Section 38.
2. The time limit to claim ITC on invoices or debit notes for a financial year is revised. The claim must be made by either November 30th of the following year or the date of filing annual returns, whichever is earlier.
3. Section 38 is completely revamped as 'Communication of details of inward supplies and input tax credit', aligning with Form GSTR-2B. It provides guidelines for ITC claims, including manner, time, conditions, and restrictions. It also removes the two-way communication process in GST return filing for the suspended return in Form GSTR-2 and ensures that taxpayers receive information on eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove references to provisional ITC claims and introduces self-assessed ITC claims with conditions.
5. Sections 42, 43, and 43A, which deal with provisional ITC claim process, matching, and reversal, are eliminated.
December 29, 2021
Amendment to CGST Rule 36(4) removes the provision of 5% additional ITC over and above the ITC appearing in GSTR-2B. Starting from January 1, 2022, businesses can avail ITC only if the supplier reports it in GSTR-1/IFF and it appears in their GSTR-2B.
December 21, 2021
From January 1, 2022, ITC claims will only be allowed if they appear in GSTR-2B. Therefore, taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4) and must ensure that every claimed ITC value is reflected in GSTR-2B.
Previous Utilization of ITC before Rule 86B
Input tax credit plays a crucial role in GST as it helps avoid double taxation. The utilization order of ITC for various components such as CGST, SGST, and IGST has undergone several changes. However, the ITC available in the electronic credit ledger could always be fully utilized for discharging the output tax liability. The new Rule 86B limits the use of ITC balance for paying the output tax liability.
Restrictions Imposed by Rule 86B
Rule 86B restricts the utilization of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule supersedes all other CGST Rules.
Applicability: This rule applies to registered persons whose taxable value of supply (excluding exempt supply and zero-rated supply) in a month exceeds Rs. 50 lakh. The limit must be checked every month before filing each return.
Restriction: Registered persons to whom this rule applies cannot use ITC exceeding 99% of their output tax liability. In simple terms, more than 99% of the output tax liability cannot be cleared using input tax credit.
Exceptions to the Rule:
If the following persons have paid more than Rs. 1 lakh as Income Tax under the Income Tax Act, 1961:
- The registered person
- Proprietor, karta, or Managing Director of the registered person
- Any partners, whole-time directors, or any other persons, as applicable.
If the registered person has received a refund of an amount greater than Rs. 1 lakh in the previous financial year due to export under LUT or due to an inverted tax structure.
If the registered person has already discharged their output tax liability through the electronic cash ledger for an amount exceeding 1% of the total output tax liability in the current financial year.
If the registered person falls under any of the following categories:
- Government department
- Public sector undertaking
- Local authority
- Statutory Authority
Impact of Rule 86B on Businesses and Working Capital
After considering the restrictions and exceptions introduced by Rule 86B, it is evident that this rule only applies to large taxpayers. Micro and small businesses will not be affected.
The purpose of introducing this rule is to control the issue of fake invoices and prevent the misuse of fake input tax credit for discharging tax liability. It also aims to curtail fraudsters from showing high turnovers without having any financial credibility.
CBIC has clarified that the 1% calculation should be based on the tax liability and turnover in a month.
Illustration
Let's understand this with an example:
Mr. A, a taxpayer, has made a sale of goods worth Rs. 1 crore with a tax rate of 12%. According to this rule, he can utilize 99% of his tax liability through ITC and must pay Rs. 12,000 in cash.
Although this rule may inconvenience genuine taxpayers, the government's objective is to prevent fake invoicing and reduce tax evasion.
All About Rule 86B under GST: Restriction on Utilization of ITC in Electronic Credit Ledger
The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new rule, 86B, through notification number 94/2020 dated December 22, 2020. The effective date for Rule 86B is January 1, 2021.
1. ITC cannot be claimed if it is restricted in GSTR-2B, as stated in Section 38.
2. The time limit to claim ITC on invoices or debit notes for a financial year is revised. The claim must be made by either November 30th of the following year or the date of filing annual returns, whichever is earlier.
3. Section 38 is completely revamped as 'Communication of details of inward supplies and input tax credit', aligning with Form GSTR-2B. It provides guidelines for ITC claims, including manner, time, conditions, and restrictions. It also removes the two-way communication process in GST return filing for the suspended return in Form GSTR-2 and ensures that taxpayers receive information on eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove references to provisional ITC claims and introduces self-assessed ITC claims with conditions.
5. Sections 42, 43, and 43A, which deal with provisional ITC claim process, matching, and reversal, are eliminated.
December 29, 2021
Amendment to CGST Rule 36(4) removes the provision of 5% additional ITC over and above the ITC appearing in GSTR-2B. Starting from January 1, 2022, businesses can avail ITC only if the supplier reports it in GSTR-1/IFF and it appears in their GSTR-2B.
December 21, 2021
From January 1, 2022, ITC claims will only be allowed if they appear in GSTR-2B. Therefore, taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4) and must ensure that every claimed ITC value is reflected in GSTR-2B.
Previous Utilization of ITC before Rule 86B
Input tax credit plays a crucial role in GST as it helps avoid double taxation. The utilization order of ITC for various components such as CGST, SGST, and IGST has undergone several changes. However, the ITC available in the electronic credit ledger could always be fully utilized for discharging the output tax liability. The new Rule 86B limits the use of ITC balance for paying the output tax liability.
Restrictions Imposed by Rule 86B
Rule 86B restricts the utilization of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule supersedes all other CGST Rules.
Applicability: This rule applies to registered persons whose taxable value of supply (excluding exempt supply and zero-rated supply) in a month exceeds Rs. 50 lakh. The limit must be checked every month before filing each return.
Restriction: Registered persons to whom this rule applies cannot use ITC exceeding 99% of their output tax liability. In simple terms, more than 99% of the output tax liability cannot be cleared using input tax credit.
Exceptions to the Rule:
If the following persons have paid more than Rs. 1 lakh as Income Tax under the Income Tax Act, 1961:
- The registered person
- Proprietor, karta, or Managing Director of the registered person
- Any partners, whole-time directors, or any other persons, as applicable.
If the registered person has received a refund of an amount greater than Rs. 1 lakh in the previous financial year due to export under LUT or due to an inverted tax structure.
If the registered person has already discharged their output tax liability through the electronic cash ledger for an amount exceeding 1% of the total output tax liability in the current financial year.
If the registered person falls under any of the following categories:
- Government department
- Public sector undertaking
- Local authority
- Statutory Authority
Impact of Rule 86B on Businesses and Working Capital
After considering the restrictions and exceptions introduced by Rule 86B, it is evident that this rule only applies to large taxpayers. Micro and small businesses will not be affected.
The purpose of introducing this rule is to control the issue of fake invoices and prevent the misuse of fake input tax credit for discharging tax liability. It also aims to curtail fraudsters from showing high turnovers without having any financial credibility.
CBIC has clarified that the 1% calculation should be based on the tax liability and turnover in a month.
Illustration
Let's understand this with an example:
Mr. A, a taxpayer, has made a sale of goods worth Rs. 1 crore with a tax rate of 12%. According to this rule, he can utilize 99% of his tax liability through ITC and must pay Rs. 12,000 in cash.
Although this rule may inconvenience genuine taxpayers, the government's objective is to prevent fake invoicing and reduce tax evasion.
Author
Pluto Team
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