Rule 86B of CGST Rules: 1% GST Payment if monthly Turnover Exceed Rs. 50 Lakh

Rule 86B of CGST Rules: Is it really what we think it is?

Applicable from 1^st January, 2021

1. Rule 86B (Restriction on use of Input Tax Credit for discharging the output liability) has been inserted into CGST Rules, 2017 vide notification no. 94/2020-Central Tax Dated 22nd December 2020 (Central Goods and Services Tax (Fourteenth Amendment) Rules, 2020, to be implemented w.e.f.1st January, 2021.
2. 2. This rule basically says that if the taxpayer’s taxable turnover exceeds above Rs.50,00,000/- in a given month, then in that month, the taxpayer is required to pay 1% of output liability of such taxable turnover by cash ledger i.e. ITC is restricted to 99% even though taxpayer may have sufficient balance in his credit ledger.
3. This has generally been considered a bad move and has made many tax professionals and taxpayers, outraged at the audacity of the Government to bring out such a drastic change in GST Laws which may potentially affect huge section of taxpayers.
4. Primary stated objective of bringing out this Rule is to curb fake invoices menace which has been plaguing the entire GST ecosystem while the Government seems like a mute spectator, till now.
5. Now, I have been doing GST compliances of over 150 of our clients, and today morning, unable to decide which compliance to take up and to avoid the negative energy floating all around due to reluctance of our Hon. Finance Minister to extend due dates in timely manner, I thought why not make our clients aware of the storm they are going to face, in coming months, due to this newly inserted Rule 86B.

Interestingly enough, I didn’t even have to check applicability of proviso (d) of the Rule 86B, which states that restriction under this Rule shall not apply where – 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.

Annual taxable turnover is in excess of 6 Crores, i.e. All 12 months taxable turnover exceeding 50 Lacs, AND not engaged in Export under LUT/Inverted Supply, AND taxpayer itself or its partners/directors not paying Income Tax in excess of Rs.1,00,000/- AND has not paid at least 1% of the cumulative total output liability upto a given month through cash ledger.

In our honest opinion, not many taxpayers would fall under this category as they would ideally be discharging 1% or more of their output liability by cash ledger. Having said this, this category of taxpayers are justified to have been subjected to provisions of Rule 86B. If this category of taxpayers are either not paying 1% of its GST liability by cash ledger or not paying Rs.1,00,000/- as income tax on back of taxable turnover of over Rs.6 Crores, then prima facie it raises suspicion and subjecting this category of taxpayers to Rule 86B will not be a bad idea.

 

However, certain genuine taxpayers falling under this category are likely to hit by this Rule, e.g.

If a taxpayer has setup a new business and has incurred huge capital expenditure resulting in (a) huge ITC on capital assets and (b) business loss due to depreciation claim on those capital expenditure.

If a taxpayer has huge brought forward loss under Income Tax and genuinely availed ITC credit on huge inventory which now it intends to sell.

Occasional monthly taxable turnover exceeding 50 Lacs but not all months’ taxable turnover exceeding 50 Lacs, AND not engaged in Export under LUT/Inverted Supply, AND taxpayer itself or its partners/directors not paying Income Tax in excess of Rs.1,00,000/- AND has not paid at least 1% of the cumulative total output liability upto a given month through cash ledger.

In our honest opinion, not many taxpayers would fall under this category as they would ideally be discharging 1% or more of their output liability by cash ledger. Having said this, Taxpayers covered under this category would ideally be engaged in (a) Any seasonal commodity business, (b) Business of Contractors where Running Invoices are issued, (c) Businesses where instance of levy arises very few times in a year e.g. CAs who issue tax invoices in Sep/Oct after completing the service of audit/other filings, (d) Annual Maintenance Contracts business etc.

Taxpayers covered in this category would be mainly service providers. And ideally, ITC available to them would be in any way very scarce and they would have already been discharging their GST liability by cash ledger, if not more, then atleast 1% of their output liability.

However any taxpayer covered in this category has access to genuine ITC and has been subjected to the provisions of this Rule then also the effect would be very minimal at Rs.9,000/- in incremental investment in working capital. (Considering 50 Lacs @ 18% GST = 9 Lacs Output Liability @ 1% = Rs.9,000/-). Also Rs.9,000/- paid through cash ledger would count as discharging the output liability through cash ledger in any subsequent month in which taxable turnover exceeds 50 Lacs.

It is well understood concept under GST regime, that the taxpayer who consistently has credit balance in its credit ledger, even after discharging its output liability on a regular basis, is a taxpayer, who is either-

 

Involved in Export without payment of Tax, or,

Engaged in business where inverted rate structure exists, or,

Has set up a new business and has high ITC due to investment in capital goods, or,

Engaged in exclusively exempted supply and has erroneously availed ITC on its input, or,

Engaged in exempted as well as taxable supply and has failed to reverse pro rata credit on exempted outward supply

Though this list may not be exhaustive, it will cover over 99.50% of the taxpayers, in our honest opinion.

 

Another kind of taxpayer, apart from those mentioned in 10 above, whose credit ledger is always in green, even after discharging its output liability on a regular basis, is a Criminal. He never wants to pay GST by cash ledger and is always on a hunt to get his hands on fake invoices to save do paisa. Unknown to this criminal, due to his demand a whole new business has taken a shape to provide fake invoices. This menace of fake invoices has not only impacted future cash inflows for Government, it has succeeded in siphoning off with refunds of thousands of crores with the help of those fake invoices. So obviously and rightly so, the Government has to turn its primary focus to curb fake invoices menace, since last one year.

 

Author of the Article: CA. Haresh Dhaduk