CBIC Rule 86B: Limits on ITC Utilization

CBIC Rule 86B: Limits on ITC Utilization

The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new rule, 86B, via notification number 94/2020 dated December 22, 2020. This rule, which became effective on January 1, 2021, places restrictions on the utilization of Input Tax Credit (ITC) in the electronic credit ledger under the Goods and Services Tax (GST) system.

Previously, ITC could be fully utilized for discharging output tax liability. However, Rule 86B limits the use of ITC balance for this purpose. The rule applies to registered individuals who have a taxable value of supply exceeding Rs. 50 lakh in a month (excluding exempt and zero-rated supplies). The limit must be checked every month before filing returns.

Under this rule, registered persons cannot use ITC in excess of 99% of their output tax liability. In other words, more than 99% of the output tax liability cannot be settled using ITC.

There are exceptions to this rule. Individuals who have paid more than Rs. 1 lakh as Income Tax under the Income Tax Act, 1961, and certain authorized individuals (such as partners or directors) are exempt. Additionally, those who have received a refund of over Rs. 1 lakh in the previous financial year due to export or inverted tax structure, or have discharged their output tax liability by electronic cash ledger for an amount exceeding 1% of the total liability up to the current month in the current financial year, are also exempt.

The rule primarily targets large taxpayers and aims to combat fake invoicing and fraudulent use of input tax credit. The government's objective is to prevent the misuse of ITC and curb tax evasion.

It is important to note that 1% is calculated based on the tax liability and turnover in a given month.

While this new rule may inconvenience genuine taxpayers, it serves the purpose of ensuring compliance and reducing fraudulent activities.

The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new rule, 86B, via notification number 94/2020 dated December 22, 2020. This rule, which became effective on January 1, 2021, places restrictions on the utilization of Input Tax Credit (ITC) in the electronic credit ledger under the Goods and Services Tax (GST) system.

Previously, ITC could be fully utilized for discharging output tax liability. However, Rule 86B limits the use of ITC balance for this purpose. The rule applies to registered individuals who have a taxable value of supply exceeding Rs. 50 lakh in a month (excluding exempt and zero-rated supplies). The limit must be checked every month before filing returns.

Under this rule, registered persons cannot use ITC in excess of 99% of their output tax liability. In other words, more than 99% of the output tax liability cannot be settled using ITC.

There are exceptions to this rule. Individuals who have paid more than Rs. 1 lakh as Income Tax under the Income Tax Act, 1961, and certain authorized individuals (such as partners or directors) are exempt. Additionally, those who have received a refund of over Rs. 1 lakh in the previous financial year due to export or inverted tax structure, or have discharged their output tax liability by electronic cash ledger for an amount exceeding 1% of the total liability up to the current month in the current financial year, are also exempt.

The rule primarily targets large taxpayers and aims to combat fake invoicing and fraudulent use of input tax credit. The government's objective is to prevent the misuse of ITC and curb tax evasion.

It is important to note that 1% is calculated based on the tax liability and turnover in a given month.

While this new rule may inconvenience genuine taxpayers, it serves the purpose of ensuring compliance and reducing fraudulent activities.

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