Restriction on utilisation of ITC available in Electronic Credit Ledger (GST Rule 86B) with examples

Restriction on utilisation of Input Tax Credit (ITC) available in Electronic Credit Ledger (GST Rule 86B) with examples discuss by CA. Satuti Mahajan.

A taxpayer who is liable to collect tax from the recipient of supply, should remit the same to the exchequer after deducting the tax paid by him as a recipient for the supplies he received in his account. However there are various restrictions for the utilisation of the tax paid by the taxpayer while discharging his output tax liability. He is able to utilise the tax paid by him, usually called as input tax credit, only when the same is finally remitted to the Government by the supplier.

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How was ITC utilization allowed before Rule 86B:-
Input tax credit plays a very important role in GST by avoiding cascading effect of taxation. The order of utilisation of ITC for different components such as CGST, SGST and IGST has gone through a lot of changes. However, the ITC available in the electronic credit ledger could always be fully utilised for discharging the output tax liability. The new Rule 86B has limited the use of ITC balance for paying its output tax liability.

What is the restriction imposed under Rule 86B:-
Rule 86B limits the use of Input tax credit (ITC) available in the electronic credit ledger for discharging the output tax liability. This rule has an overriding impact on all the other CGST Rules.
Applicability:- This rule is applicable to registered persons having taxable value of supply (other than exempt supplY and zero-rated supply) in a month which is more than Rs.50 lakh. The limit has to be checked every month before filing each return.
Restriction imposed:- The applicable registered persons cannot use ITC in excess of 99% of output tax liability. In simple words, more than 99% of the output tax liability cannot be discharged by using input tax credit.

Exceptions to the Rule 86B:-
If the persons mentioned below have paid more than Rs.1 lakh as Income Tax under Income Tax Act, 1961
The registered person
Proprietor, karta or Managing Director of the registered person
Any of the partners or whole time directors or any other person as the case may be.
If the registered person under concern has received a refund of amount greater than Rs.1 lakh in the preceding financial year on account of export under LUT or due to inverted tax structure.
If the registered person under concern has discharged his liability towards output tax by electronic cash ledger for an amount in excess of 1% cumulatively of the total output tax liability up to the said month in the current financial year.
If the registered person under concern is any of the following:
Government department
Public sector undertaking
Local authority
Statutory Authority

Impact of Rule 86B on businesses & working capital:-
After going through the above restrictions and exceptions introduced by Rule 86B, it is clear that the above rule is applicable only to the large taxpayers. There will be no impact on micro and small businesses. 
The motto behind the introduction of this rule is to control the issue of fake invoices to use the fake input tax credit to discharge liability. Further, it restricts fraudsters from showing high turnovers without having any financial credibility.
CBIC has further clarified that 1% is to be calculated on the tax liability in a month and the turnover of the respective month.

DISCLAIMER :-
This Video is for the purposes of information / knowledge and shall not be treated as solicitation in any manner or of for any other purposes whatsoever.

It shall not to be used for any legal advice /opinion and shall not to be used to rendering any professional opinion. Viewers are advised to kindly go through to original Government publications / notifications and published case laws or judicial pronouncements.

The statements and opinions expressed in video are those of the speaker and do not necessarily reflect those of the CA Sansaar or any of its employees. CASansaar Team does not take any responsibility for the views of the Speaker.

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[rajnishupadhyay]

Helpful video, Thank you mam for giving this important update

[debashissen]

Very good & useful video I was badly waiting for some video on this sec.

[udaykumar-jlrn]

[ maam rule 86b me monthly 50lakh se upar hona chahiye ya total month add karke, 50 lakh se upar hona chahiye

[samiganatra]

If a partnership firm has 3 partners and each one is paying 50000(aggregate 150000) income tax then this rule is applicable??

[balajisambathkumar]

speech fully in English required. We dont know Hindhi..

[donaldktrump]

Modi ji ko hata do faltu mai paresaan karta rahta hai