Introduction
Rule 86B of the CGST Rules, 2017 imposes a restriction on the use of Input Tax Credit (ITC) for discharging GST liabilities, impacting businesses with a turnover exceeding ₹50 lakh in a given month. While this rule aims to curb tax evasion, it also comes with certain exceptions that provide relief in specific scenarios. This article explains the provisions of Rule 86B, its exceptions, and practical illustrations to help taxpayers understand its implications.
This post is an extracted version of an article originally submitted by a CA Abinaya and published as a PDF on our website. You can access the original PDF version here.
Rule 86B
Bare Provision
Rule 86B. Restrictions on use of amount available in electronic credit ledger.-
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 sub-section (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 sub-section (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 authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.
Applicability
If Monthly taxable turnover of a registered person exceeds Rs.50 Lakhs, then it is important to note that the registered person shall not use the ITC available in electronic credit ledger to discharge his outward liability exceeding 99% of the liability payable.
In other words, Rule 86B restricts the use of input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule has an overriding impact on all the other CGST Rules, due to the non-obstante clause at the beginning. The restriction applies 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 lakh. The limit has to be checked every month before filing each return.
Purpose
To curb the fake invoices issued to reduce the tax liability
Exceptions
1. Individuals paying Income Tax exceeding Rs. 1 Lakh
In cases where the following individuals have paid income tax exceeding Rs. 1 lakh in each of the last two financial years for which the time limit for filing the return has expired, the provisions are applicable to:
a. A registered taxpayer
b. The Karta of a Hindu Undivided Family (HUF)
c. The Managing Director of a company
d. Any of the partners in a partnership firm
e. Whole-time Directors of a company
f. Members of the Managing Committee of an association
g. Trustees of a trust
Illustration – 1
For the month of July 2024, the taxable turnover of Abinaya Ltd. is Rs. 56 Lakhs.
The due date for filing the ITR for the FY 2023-24 is 31st October 2024. As the due date for filing the ITR for FY 2023-24 has not yet expired, the relevant financial years to be considered for the applicability of Rule 86B are FY 2021-22 and FY 2022-23.
In accordance with the provisions, if the income tax paid by any of the individuals specified in the relevant rules exceeds Rs. 1 lakh in both FY 2021-22 and FY 2022-23, the restrictions under Rule 86B will not apply.
If the taxable turnover for December 2024 is Rs. 70 Lakhs, and the ITR for FY 2023-24 has not been filed, with the due date for filing having already expired, the relevant financial years to be considered for the applicability of Rule 86B will be FY 2022-23 and FY 2023-24
In this case, the income tax paid for FY 2023-24 will be presumed to be “0” since the ITR for FY 2023-24 has not been filed within the prescribed due date.
2. Taxpayer receiving refund in excess of Rs. 1 Lakh
This rule shall not apply to the registered taxpayer who has received a refund of more than Rs. 1 Lakh in the preceding financial year on account of unutilized input tax credit because of export / inverted rate structure under GST.
3. Rule not to apply in certain cases
This rule shall not apply to the registered person which is a Govt department, PSU, Local Authority or Statutory body.
4. Already discharged in Cash
This rule shall also not apply to the registered taxpayer who has already discharged outward tax liability using cash ledger in excess of 1% of such tax liability.
Illustration – 2
A Ltd did not fulfill any of the exemption mentioned in Rule 86B and has taxable turnover of Rs.60 Lakhs, Outward Tax – Rs.10.80 Lakhs, ITC Available – Rs. 20 Lakhs
The maximum ITC can be used is Rs. 10,69,200/ and Mandatory Cash payment will be Rs. 10,800/-
Disclaimer
The content provided in this newsletter is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure the accuracy and reliability of the information, it may not reflect the most current legal or regulatory developments. Readers are advised to consult with a qualified professional or refer to official government resources for specific advice related to Goods and Services Tax (GST) or any other tax matters. The publisher and the author assumes no liability for any errors, omissions, or outcomes arising from the use of this content.
Credits
This post is an extracted version of an article originally submitted by a CA Abinaya and published as a PDF on our website. You can access the original PDF version here.
CA Abinaya is a Practicing Chartered Accountant with a strong background in accounting, auditing, and taxation. She holds a degree in Commerce from the University of Madras and has 7 years of work experience in this field, including articleship. Throughout her career, she has gained a wealth of knowledge and experience in accounting, auditing, and direct & indirect taxation, and is always looking for new challenges and opportunities to excel in her profession.
