Post implementation of GST, every registered person was entitled to avail input tax Credit on Self Assessment basis. ITC availed was required to be reconciled with ITC auto-populating in GSTR-2A. However, through notification dated 9th October, 2019, Rule 36(4) came into effect which restricted ITC to the extent of ITC already appearing in GSTR-2A with a variation of 20%.
Such a limit now reduced to 5% later on. Further, a new Form, GSTR-2B, started auto-populating which consisted of ITC to be claimed based on the date of filing of return by supplier. Post limit amount of ITC to be claimed, government has restricted the utilization of ITC through inserting Rule 86B and restricted the utilization of ITC upto 99% i.e. 1% of output supplies to be paid in cash each month subject to certain conditions.
In following possible cases, a registered person can have excess balance of ITC always:
- Zero rated supply without payment of GST; or
- GST Rate on output is less than GST rate applicable on inputs, i.e., inverted duty structure; or
- Sales price of the product is lower than the purchase price of products; or
- a registered person is having accumulated stocks.
To avoid this chain of accumulation of Input Tax Credit, the CBIC (Central Board of Indirect Taxes and Customs) has inserted new Rule 86B in Central Goods and Services Rules,2017 (CGST Rules) vide Notification No. 94/2020-Central Tax dated December 22, 2020- Central Goods and Services Tax Rules (Fourteen Amendment),2020.
As per Rule 86B of CGST Rules, a registered person cannot pay his output tax liability through Input Tax Credit in excess of 99% of his output tax liability. Therefore, registered person is require to pay 1% of his output Tax Liability in cash.
|Output Tax Liability,, during December, 2020
|Input Tax Credit available in Electronic Credit Ledger (Including current month ITC)
|Output Tax Liability to be paid through ITC
|5,00,000 * 99%= 4,95,000
|Output Tax Liability- To be paid in Cash
|5,00,000 * 1%= INR 5,000
The rule 86B shall apply only if the value of taxable supply, other than exempted supply and zero rated supply, in a month exceeds INR 50,00,000. This limit is to be checked for each month for which return is being filed. Therefore, if during any month, amount of taxable supply does not exceed INR 50,00,000 then provisions of Rule 86B shall not apply and the entire amount of output tax liability can be paid through utilisation of ITC, if available.
Provision of Rule 86B shall come into effect from 1st January, 2020.
1. Non applicability of Rule 86B
Rule 86B have specified following class of registered persons to whom provisions of Rule 86B shall not apply:
- Where income tax payment is made by any of the following persons of more than INR 1,00,000 in each of the last two financial years for which the time limit to file return of income under section 139(1) of the said Act has expired:
- Such registered person
- The proprietor or Karta or the managing director or any of its two partners, whole time directors, Members of managing committee of Association or Board of Trustees, as the case maybe.
- When a registered person has received a refund amount of more than INR 1,00,000 in the preceding financial year on account of unutilized input tax credit under Section 54(3)(i) of CGST Act, 2017- Refund of ITC accumulated on account of zero rated supply without payment of IGST.
- When in the preceding financial year, a registered person has received a refund amount of more than INR 1,00,000 on account of unutilized input tax credit under section 54(3)(ii)- ITC accumulated on account of inverted duty structure.
- The restriction of the rule 86B is not applicable where the registered person has discharged his liability towards output tax from the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively up to the said month in the current financial year.
|Output Tax Liability
|Input Tax Credit
|ITC utilised for payment of Output Tax Liability
|Output Liability paid through cash
|Balance in ITC Ledger
|9,90,000(As per Rule 86B)
|10,000(As per Rule 86B)
|2,10,000(12,00,000 – 9,90,000)
* Accumulated Tax payment status till June, 2021:
- Cumulative Output Tax Liability till current month, i.e., June, 2021: INR 30,00,000
- Cumulative Output Liability paid in cash: INR 3,00,000 (2,90,000+10,000)
- Rule 86B shall not apply in the Month of June, 2021 as 1% of Cumulative Output Liability has already been paid in cash.
Therefore, the taxpayer has to check 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 in the current financial year.
5. Where registered person is either of the following:
- Government Department
- A public Sector Undertaking
- A local authority
- A statutory body
Rule 86B can prove to create the biggest cash burden on registered persons who are genuinely incurring cash losses as they need to pay GST in cash irrespective of accumulated ITC lying in Electronic Credit Ledger.
Further, as per Section 54(3) of CGST Act, refund of ITC can be claimed in either of following cases:
- ITC accumulated due to Zero rated supply without payment of IGST; or
- ITC accumulated due to inverted duty structure
Therefore, in given caes, balance in Electronic Credit Ledger will keep on complying due to GST paid in cash also and also there is no provision given to claim refund of such ITC. Such provision can cause undue hardship to taxpayers.