With an intention to curb fake invoice transactions, the central government vide notification no. 94/2020 – Central Tax, dated December 22, 2020, has added a new rule 86B in the CGST Rules 2017.Accordingly, there is a restriction in the use of ITC (Input Tax Credit) which is available in the electronic credit ledger while making the payment of output tax to up to 99 percent. This implies that businesses are now required to pay 1 percent of their output tax liability (OTL) in cash.
Example to Understand the GST 86B Rule:
In a scenario where a businessman makes sale of goods of value INR 2 crores, the tax rate would be on the goods. So, here as per the notification of rule 86B, the person is liable to discharge up to 99 percent of his tax liability through ITC and must pay INR 28000 in cash.
Applicability of Rule 86B
Rule 86B is with a non-obstante clause. This implies that this rule overrides all other rules of GST from the date of its enforcement, i.e., 1st January 2021. Below mentioned are the applicability conditions:
- The rule applies to GST-registered businesses with more than 50 lakhs taxable valued goods in a month.
- The taxable turnover will be exclusive of exempt and zero-rated supply.
- A person should check the value of their goods each month while filing their GST returns.
- The taxable turnover can be calculated as, Taxable turnover = Total turnover of the person – (Zero rated + exempted turnover)
Restrictions Imposed by the Rule 86B
The restrictions imposed according to the notification of rule 86B are as follows –
- It limits the use of Input tax credits or ITC in the electronic credit ledger for discharging the OTL.
- If the registered person has a turnover of more than 50 lakhs in a month, they can only pay 99 percent of their OTL with their ITC.
- The remaining one percent of the output tax is to be paid in the form of cash.
Utilization of ITC before the Notification of GST Rule 86B:
Input Tax Credits, or ITC, is a crucial 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 OTL. 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 the Rule 86B:
- Any person mentioned in the list below, who has paid an annual income tax greater than INR one lakhs 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 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 Rule 86B.
- When a registered person in question has paid his OTL using the electronic cash ledger of an amount that is more than 1 percent collectively of the entire OTL on the person in the given month in a given financial year.
- The person is exempted from any tax if they hold any of the following offices –
- Local authority
- PSU
- Statutory authority
- Government department
Rule 86B Impact on Different Types of Businesses:
- This new rule will have no impact on small-scale and micro businesses as it has a limit of 50 lakhs which applies only to large taxpayers.
- The rule will reduce the unethical business practices such as creating counterfeit invoices that are later used for creating counterfeit input tax credits. They then use these fake ITCs to discharge their output tax liabilities.
- This will also prevent fraudsters from displaying false high turnovers, which would lead to higher financial credibility.
- The restrictions in the rule will also increase the compliance burden on the taxpayers.
The bottom line is that the central government has brought in rule 86B to cut down on tax evasion and stop fake invoicing. However, it has created some problems for those genuine taxpaying large-scale businesses that have come under the ambit of this law. These businesses generally run on very low margins of profits due to various industrial practices and are new in the trade. And if a business is taxed under this new rule, they need to get some expert advice on filing GST returns so that they know exactly how much they need to pay in taxes and how much tax exemptions they are eligible for.
