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Introduction of Rule 86B
With an objective to curb the teething issue of fake invoicing and inadvertent transfer of input tax credit, the Central Board of Indirect Taxes & Customs on 22nd Dec’20 inserted a new rule via amendment in CGST Rules, 2017 i.e., ‘Rule 86B- Restriction on use of amount available in Electronic Credit Ledger’. The said rule has been made effective w.e.f. 01.01.2021 i.e. for returns filed for the period starting from 1st Jan’21.
Applicability of Rule 86B
The said rule is applicable to all the registered persons who have affected taxable supplies in excess of Rs. 50 Lakhs in a month. However, for the calculation of such limit, the following supplies will not be included: –
Exempt Supplies Zero Rated Supplies
Exceptions to Applicability of Rule 86B
- A registered person qualifying the applicability criteria provided above can still be out of the purview of Rule 86B if it is covered under any of the following category: –
| S. No. | Type of Entity | Person |
| 1. | Proprietorship | Proprietor |
| 2. | Hindu Undivided Family (HUF) | Karta |
| 3. | Partnership Firm | Any 2 partners |
| 4. | Company | All Managing Director or Whole time Directors |
| 5. | Trust | Board of Trustees |
| 6. | Association of Person (AOP) | Member of Managing Committee of Association |
[Author’s Remarks: -This means that if the registered person has paid income tax of more than Rs. 1,00,000/- in the preceding two financial years then Rule 86B shall not apply. Also, income tax payment shall be considered irrespective of the fact whether the same is paid through TDS. Further, this will also include where MAT is payable.]
2. The registered person has received a Refund for Export without Payment of Tax to the tune of Rs. 1 Lakh or more during the preceding Financial Year.
[Author’s Remarks: – Exporters claiming refund of ITC on export of more than Rs. 1,00,000/- in preceding financial year shall not be hit by this rule]
3. The registered person has received the refund under Inverted Duty Structure to the tune of Rs. 1 Lakh or more during the preceding Financial Year.
[Author’s Remarks: – Exporters claiming refund of ITC on inverted duty structure of more than Rs. 1,00,000/- in preceding financial year shall not be hit by this rule]
4. The registered person is already paying its GST liability more than 1% in cash applied cumulatively up to the said month in the current financial year.
[Author’s Remarks: – To illustrate, if in the Financial Year 2020-21, upto Dec’20 the output tax liability comes out to be Rs. 10 Lakh and the taxpayer has deposited Rs. 10,000/- in cash upto Dec’20 then this rule shall not stand applicable.]The registered person is a Government Department.
5. The registered person is a Public Sector Undertaking.
6. The registered person is a Local Authority.
7. The registered person is a Statutory Body
(Note: The commissioner or an officer authorized by him is his behalf may remove the said restrictions after such verification and such safeguards as he may deem fit)
How much to Pay?
In case a registered person qualifies the above applicability, criteria and is not covered under any of the exceptions provided above, then he is required to pay 1% of its total GST liability in cash even if he has surplus balance in its E-Credit Ledger while filing the return for the respective month. In other words, the taxpayer can only use its Input Tax Credit for payment of only 99% of its total GST liability.
Consequences of Violation of Rule 86B
Violation of Rule 86B shall provide the tax authorities to invoke the provisions of cancellation of registration on the registered person and non-payment of tax liability in cash shall attract interest provisions u/s 50 of the Act.
Unanswered Questions
Q1. Under which head the taxpayer is required to pay the tax amount? CGST? SGST? or IGST?
Q2. Whether the scheme once applicable to a taxpayer in any month shall be continued in the subsequent month/ years?
Q3. Whether the cash payment under Reverse Charge Mechanism shall form the part of 1% cash payment?
Q4. Whether the limit shall apply cumulatively for months wherein the total sales for the said month is less than Rs. 50 Lakhs?
Other Important Aspects
A corresponding amendment has also been made in Rule 59 by inserting a sub-rule (5) which reads as under: –
(5) Notwithstanding anything contained in this rule, –
(a) a registered person shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR-1, if he has not furnished the return in FORM GSTR-3B for preceding two months.
(b) a registered person, required to furnish return for every quarter under the proviso to sub-section (1) of section 39, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR-1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR-3B for preceding tax period.
(c) a registered person, who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax in excess of ninety-nine per cent. of such tax liability under rule 86B, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR-1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR-3B for preceding tax period.
This means in case a registered person, who is restricted from using the amount available in electronic credit ledger to the tune of 99% shall not be allowed to furnish the details of outward supply of goods or services, in case he has not furnished the return in Form 3B.
Conclusion
In words of Department, “We have arrived at this rule after detailed deliberations in the GST Council’s Law Committee to identify and control only fraudsters involved in fake invoices and input tax credits. Our nationwide drive against such frauds led to 175 arrests and more than 1800 cases being booked against 8000 fake entities since the second week of November”.
Though CBIC in its multiple tweets and communications has made it clear that this rule shall be applicable to only 0.5% of the total tax-payers base of 1.2 crores, let’s see what this rule brings when it is actually set into place.