86b gst rule: Restriction on ITC Utilization in Electronic Credit Ledger

New rule 86B, vide notification number 94/2020 dated December 22, 2020, has been introduced by the Central Board of Indirect Taxes and Customs (CBIC). Rule 86B is which is effective from 1st January 2021.

Applicability of 86B GST Rule

GST Rule 86B is attached with a non-obstante clause. This rule is overrides all other rules of GST, which are from the date of its enforcement, i.e., 1st January 2021. This rule is applied under the following conditions:

1. The rule applies to GST-registered businesses whose goods in a month have more than 50 lakhs taxable value.
2. The taxable turnover will be exclusive of exempt and zero-rated supply.
3. A person should check the value of their goods each month while filing their GST returns.
4. The taxable turnover can be calculated as – Taxable turnover = Total turnover of the person – (zero-rated + exempted turnover).

Restrictions Imposed by 86B GST Rule

There are restrictions imposed on 86b gst rule notification as follows:

1. It limits the use of input tax credits, or ITC, in the electronic credit ledger for discharging the outward tax liability.
2. If the registered person has a turnover of more than 50 lakhs in a month, they can only pay 99 percent of their outward tax liability with their ITC.
3. The remaining one percent of the output tax is to be paid in the form of cash.

Utilization of ITC before the Notification of 86B GST Rule:

Input Tax Credits, or ITC, is a most important part of the GST filing process and has saved business persons from taxation’s cascading effect. This credit, which was stored in the electronic credit ledgers, has been used by the business for the payment of outward tax liability. Earlier, businesses were able to utilize ITC for the payment of taxes fully. Ever since Rule 86B came into effect, the usage of ITC balance towards the payment of output tax liability has been limited, and this needs to be kept in mind while planning the taxes.                                                 

Exceptions to Rule 86B of GST:

√Any person mentioned in the list below who is paying an annual income tax of more than INR one lakh rupees under the IT Act of 1961 is exempted from this rule.

• A registered person
• Karta of HUF
• Managing director of the business of the registered person
• Whole-time directors or any partners (in the case of the firm)
• Proprietor

√If a registered person who has received a refund of INR one lakh or more in the last financial year, this refund of unused ITC received towards export under the letter of undertaking or because of an inverted tax structure will not be accounted for under 86B GST Rule.

√When a registered person in question has paid his outward tax liability using the electronic cash ledger of an amount that is more than  percent collectively of the entire outward tax liability on the person in the given month in a given financial year.

√The person is exempt from any tax if they hold any of the following offices:

• Local authority
• PSU
• Statutory authority
• Government department