Rule 86B of CGST Rules-caution before you proceed

Rule 86B of CGST Rules-

Yes, it is the latest hurdle in taking the ITC in GST now. It is inserted via CGST fourteenth amendment rules 2020. Let us understand it in detail. Rule 86A is already there to block the ITC. Now, this new rule is going to further increase the restriction on the utilization of input tax credit.  The rule to curtail ITC is inserted in chapter IX of payment of Tax of CGST Rules. Rule 86B of CGST rules is going to cause a lot of cash crunch in the businesses.

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Applicability

First, we need to see that it is not applicable to every taxpayer. Rule 86B is applicable only on the taxpayers having a turnover of Rs. 50 lac in that month. It is not applicable to every taxpayer every month. Only if the turnover other than exempted and export turnover is more than Rs. 50 lac in a month, then Rule 86B is applicable.

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Example-1

M/s Hurricane has a turnover of Rs. 2 Crores in a previous financial year. He is filing his GST return in the month of January 2020. He has entered the following amount in return-

Export turnover- 5 Crores

Exempted turnover – 6 Crores.

Taxable turnover- 40Lac

Rule 86B is not applicable in this case. As the taxable turnover in a month is less than Rs. 50 Lac.

Example- 2 

In the same case above if the turnover reported for the next month is following.

Export turnover 50Lac

Exempted turnover -30lac

Taxable turnover – 75 lac

In this case, rule 86B is applicable. As the taxable turnover in a month is more than Rs. 50 lac

How the restriction of Rule 86B will work?

The restriction rule 86 B curtails the payment of output tax liability via the ITC ledger. It requires at least 1% of payment via cash ledger. This is a burden on taxpayers for sure. In every month your taxable turnover is more than Rs. 50 lac. You will have to pay at least 1% of the total output tax liability via cash ledger.

Various industries have varied business scenarios. Many times they accumulate stock to get the purchase discount and then sell it slowly. In some cases the product is seasonal. In those cases, they will have to carry forward the ITC and will have to make the payment in cash.

This will result in the blockage of working capital for the businesses. They will have to pay tax in cash.

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Exemptions from Rule 86B-

Following taxpayers have been exempted from the applicability of Rule 86B.

(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 an 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 a 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 subsection (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 subsection (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.‖.

Conclusion-

We need to be careful and keep some extra cash for tax payment. Expecting some more relaxation in the rules. But the government is adamant in making it strict. Let us hope for a breather.