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Restrictions imposed on the use of amount available in electronic credit ledger by introducing Rule 86B. Rule 86B limits the use of input tax credit (ITC) available in the electronic credit ledger for discharging output tax liability. The aforesaid rule starts with a non-obstante clause and has an overriding impact on any other provision of the rules.
Let us understand the completely in an epic manner of conversion between Krishna & Arjuna(Fictional Characters).
Content of Article:
◆Krishna(Fictional Character):
Hey Arjuna! How is going on?
◆Arjuna(Fictional Character):
Thank you so much Krishna for asking. I needed someone to talk to. I enjoyed our previous discussion regarding New Table 3.1.1 in GSTR 3B for reporting the notified services under section 9(5), but by looking back to the recent amendments in GST, some doubts regarding Rule 86B under GST have been raised.
◆Krishna(Fictional Character): Hahaha😀...! Arjuna, why is there tension when I am here? Tell me what doubts having been confused your mind.
Krishna, who has the authority to impose restrictions on the utilization of Input Tax Credit(ITC)?
◆Krishna(Fictional Character):
Arjuna, As per Rule 86A, The Commissioner/ an officer (not below the rank of an Assistant Commissioner) authorised by him is empowered to impose restrictions on utilization of ITC available in the electronic credit ledger if he has reasons to believe that such ITC has been fraudulently availed or is ineligible.
Krishna, in what circumstances the restrictions can be imposed on the utilization of ITC?
◆Krishna(Fictional Character):
Arjuna, the restrictions can be imposed in the following circumstances:
(i)ITC has been availed based on tax invoices/valid documents -
●issued by a non-existent supplier or by a person not conducting any business from the registered place of business; or
● without receipt of goods or services or both; or
●the tax about which has not been paid to the Government.
(ii)The registered person availing ITC has been found non-existent or not to be conducting any business from the registered place of business; or
(iii)The registered person availing ITC does not have a tax invoice/valid document.
If the ITC is so availed, the restrictions can be imposed by not allowing such ITC to be used for discharging any liability under section 49 or not allowing refund of any unutilised amount of such ITC.
Such restrictions can be imposed for a period of up to 1 year from the date of imposing such restrictions.
However, the Commissioner/officer authorised by him can withdraw such restriction if he is satisfied that conditions for imposing the restrictions no longer exist.
Krishna, What is Rule 86B? To whom this Rule 86B is applicable?
◆Krishna(Fictional Character):
Arjuna,
◆Arjuna(Fictional Character):
- The Central Board of Indirect Taxes and Customs (CBIC) has introduced new rule 86B vide notification number 94/2020 dated 22nd December 2020. Rule 86B is made effective from 1st January 2021.
- Rule 86B limits the use of input tax credit available in the electronic credit ledger for discharging output tax liability.
- The aforesaid rule starts with a non-obstante clause and has an overriding impact on any other provision of the rules.
- Rule 86B applies to the registered person having the value of taxable supply (other than exempt supply and zero-rated supply) in a month exceeding ₹ 50 lakhs.
- Therefore, in cases wherein the value of taxable supply in a month is less than ₹ 50 lakhs, then this restriction would not be applicable.
Krishna I didn't get your point, would you please clearly explain what is the Nature of the restriction imposed exactly?
◆Krishna(Fictional Character):
Arjuna,
- The registered person to whom the said rule is applicable cannot utilize input tax credit above 99% of the output tax liability.
- In other words, input tax liability shall be utilized only to the extent of 99% of the output tax liability while discharging output tax liability.
- I.e "Minimum 1% of the output liability shall be discharged using electronic cash ledger".
- Let me explain the above restriction in a numerical example for a better understanding
Eg:-
The total value of the inter-State supply of TA & Associates for September 2022 is ₹ 100 lakhs. Said supply is taxable @ 18% IGST. Thus, the total output tax liability of TA & Associates is ₹ 18 lakhs. The amount available in the electronic credit ledger is ₹ 20 lakhs (IGST).
In terms of the restriction imposed by Rule 86B, TA & Associates can discharge 99% of its output tax liability, i.e. ₹ 17,82,000 (99% of ₹ 18,00,000) from the amount available in the electronic credit ledger. However, it has to mandatorily discharge the balance of 1% of the output tax liability i.e. ₹ 18,000 (1% of ₹ 18,00,000) through an electronic cash ledger only.
Okay understood Krishna and like all the rules, this Rule 86B also has exceptions, right?
◆Krishna(Fictional Character):
Yes, you are right Arjuna, Rule 86B also have some exceptions, in the following different cases this rule 86B is not applicable, they are :
1) Payment of Income Tax more than ₹ 1 lakh:-
Rule 86B may not apply in cases whereby the person mentioned below has deposited a sum of more than ₹ 1 lakh as an income tax under the Income-tax Act, 1961) in each of the last 2 financial years for which the time limit to file the return of income under section 139(1) of the said Act has expired
◆The registered person or
◆The Karta/proprietor/the managing director of the registered person;
◆Any of the two partners, whole-time directors, members of the Managing Committee of Associations or Board of Trustees of the registered person, as the case may be.
2) Receipt of refund of the input tax credit of more than ₹ 1 lakh:౼
Rule 86B may not apply whereby a registered person has received a refund amount of more than ₹ 1 lakh on account of unutilized input tax credit under the following:
◆Zero-rated supplies made without payment of tax
◆Inverted duty structure
It is pertinent to note that a refund should have been received in the preceding financial year
3) Payment of total output tax liability through electronic cash ledger over 1% of total output tax liability:-
- If the registered person has paid more than 1% of total output tax liability using an electronic cash ledger up to the said month in the current financial year, the restrictions as specified in Rule 86B shall not apply.
The following example will be helped for a better understanding of this point:-
Eg: -
Assuming a scenario wherein in the FY 2022-23 up to December 2022, the total output tax liability payable is ₹ 30 lakhs and such registered person has deposited ₹ 1 lakh through electronic cash ledger and balance through electronic credit ledger, rule 86B would not be applicable in January 2023[if the turnover during this month exceeds ₹ 50 lakhs], since payment made in cash is more than 1% of total output tax liability. (1% of ₹ 30 lakhs is ₹ 30,000).
- Interestingly, the aforesaid exception needs to be evaluated in the ‘current financial year, and hence, for April of any financial year, the said exception will not be applicable.
- Accordingly, the registered person would be required to pay a minimum of 1% of output liability through an electronic cash ledger unless the registered person is covered under any of the other exceptions or if the taxable turnover in a month is less than ₹ 50 lakh.
- It is pertinent to note that GST liability paid under the reverse charge mechanism should not be taken into account while calculating the total output liability paid through an electronic cash ledger.
4) Specified registered person:-
Rule 86B would not be applicable in the case of the below-mentioned registered person:
◆Government Department; or
◆ A public sector undertaking; or
◆ A local authority; or
◆ A statutory body.
However, Commissioner or an officer authorised by him on this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.
Now all my doubts are cleared Krishna, but for better and crystal clear understanding, explain with an illustrative example.
◆Krishna(Fictional Character):
Arjuna, the following illustration will help you for better understanding of this whole concept:
ILLUSTRATION: -
Determine the amount of tax payable through electronic credit ledger /electronic cash ledger from the given information:
Taxable turnover of ABC Ltd in February = ₹ 1,25,00,000 (excluding zero-rated and exempt supply)
The total amount of input tax credit (as per books) for February is ₹ 25,00,000 Total amount of input tax credit (as per GSTR-2A/2B for February – is ₹ 22,00,000)
*Applicable tax rate: 18%
Answer:-
In the given case, ABC Ltd. would be liable to pay a tax of ₹ 22,50,000 (ie ₹ 1,25,00,000 X 18%). In terms of Rule 36(4) of CGST Rules, the availment of ITC is restricted to 5% of reported invoices i.e. invoices on unreported invoices auto-populated in GSTR-2A/2B. Hence, ABC Ltd would be entitled to avail of the input tax credit of :
₹ 22,00,000 (matched ITC) + 5% of 22,00,000 = ₹ 23,10,000
It can be seen from the above that ABC Ltd. can pay the entire tax liability through the utilization of available input tax credit. It is pertinent to note that the taxable turnover of ABC Ltd. for September 2022 is more than ₹ 50 lakh, hence, rule 86B would be applicable and accordingly, ABC Ltd. cannot use input tax credit in excess of 99% of the output tax liability in the instant scenario.
Therefore, a liability of ₹ 22,50,000 would be paid in the following manner: i) ₹ 22,27,500 (99% of output liability) to be paid via electronic credit ledger, and ii) ₹ 22,500 to be paid via electronic cash ledger.
◆Arjuna(Fictional Character): Thank you so much, Krishna! Finally, do you have any suggestions for our readers, Krishna?
◆Krishna(Fictional Character): Arjuna, I would like to suggest all our readers, gain knowledge from our simple conversions on this " TaxAddicters" page. Also, suggest our readers read our previous conversations from the "Also Read" section below and keep visiting and follow the "TaxAddicters" page by clicking "Follow" as given below to get notified of our new conversations without missing.
Source: ICAI
With this, see you in the next post!
Ta-da !!!
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