Rule 86B of CGST Rules- Mysterious Puzzle

[Navjot Singh]

With effect from 01.01.2021 vide Notification No. 94/2020 – Central Tax, dated 22^nd December 2020 a new rule i.e., 86B is inserted to curb the ongoing fake invoices transactions.

1. Legal Provision:

Notwithstanding anything contained in these rules, the registered person shall not use the amount available in the electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine percent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –

(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 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 sub-section (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 sub-section (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 authorized by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.”.

2. Analysis

Turnover > 50 Lakhs per month – 1% of Gross Output Tax Liability shall be payable in Cash: –

This provision of Rule 86B will be applicable only if the turnover other than exempted and export turnover is more than ₹ 50 lakhs in a month.

Example	Exempt Turnover	Export Turnover	Taxable Turnover	Rule 86B Applicable
I	3 Crore	2 Crore	46 lakhs	NO
II	52 lakhs	65 lakhs	60lakhs	YES

As per rule 86B, notwithstanding anything contained in these rules, the registered person shall not use the amount available in the electronic credit ledger to discharge his liability towards output tax above ninety-nine percent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees.

3. The important point to remember

The terms “such liability” shall mean Gross Liability on Taxable outward supplies, which would not include tax payable on procurements taxable under reverse charge mechanism payable in cash.

4. Exclusive Exclusions:

1. 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

{This means that if a regd. the person had paid income tax of more than ₹ 1,00,000/- in the preceding two financial years then Rule 86B shall not be applicable. Here, income tax payment shall be considered as paid even when paid through deduction of TDS. There is no requirement of payment being made only in cash (incl. bank). This will also include where MAT is payable}

2. the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i) of the first proviso of sub-section (3) of section 54; or

{The provision of the First proviso to section 54(3) stands for zero-rated supplies made without payment of tax & the second proviso to section 54(3) stands for a refund on account of inverted duty structure. Thus, exporters claiming refund of ITC on export or inverted duty structure of more than ₹ 1,00,000/- in proceeding financial year shall not be hit by rule 86B.}

3. the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (ii) of the first proviso of sub-section (3) of section 54; or

4. the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is more than 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or

5. 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 authorized by him on this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.

Therefore, the limit has to be verified on a cumulative basis on the monthly basis.

5. Other important factors concerning rule 86B

In rule 59, after sub-rule (4), the following sub-rule shall be inserted, namely:

“(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 the preceding two months;

(b) a registered person, required to furnish a 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 percent. 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 that in case a registered person, who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax above ninety-nine percent. 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 (IFF), if he has not furnished the return in FORM GSTR-3B for preceding tax period.

Rule 86A provides for blocking of the input tax credit by the proper officer if it is found that a registered person has availed fraudulent ITC. In light of the above-mentioned notification (94/2020 dated 22.12.2020) if a person violates rule 86B i.e. pays more than 99% through Input Tax credit having taxable turnover more than ₹ 50 lakhs, proper officer has the power to block the ITC utilization of such persons.

6. Conclusion: -

As per the clarification issued by the department regarding various questions that have arisen due to the new provision inserted vide Rule 86B, this is going to affect very few taxpayers and hence the ones taxpayers need not worry but this is not the correct ascertainment of the situation.

The mechanism is not a foolproof system to have a check and control on circular trading /fake invoices. The way the calculation of the taxpayer has been done is not the correct methodology and shortly this will hurt the economy.

If we talk about the legal aspect then there is no legal provision under GST law to curb/curtail the utilization of Input tax credit. The condition mentioned in the law is very clear concerning eligibility and nowhere in the statute, the power to curtail the vested right has been awarded.

What has happened is that the Input Tax Credit has to pass the Litmus test of Section 16, section 17, read with Rule 42, 43 and then the ceiling under Rule 36(4), further guarded by Rule 86B. This was not the intent behind the concept of “Free Flow of Credit”

In the opinion of the author, this provision does not agree with the law and the intention of the lawmakers. We are sure that this is going to create another new hardship for the taxpayer and also going to open the door for new litigation.

Word of cautious

In case the liability discharged by utilizing cash ledger on cumulative manner exceeds 1% of the total liability than there is no need to worry for the same and in case the same is not met out than the taxpayer has to keep an additional cash balance equivalent to at 1% of the total liability further depending upon other utilization restrictions imposed under GST law.

This provision in the garb of restricting fake invoices etc is complete ultra vires and decurion provision violating the fundamental vested right to avail/utilise the input tax credit.

At this point of time, let’s remind the remarks of the bench of Justices Manmohan and Sanjeev Narula in the case of ‘SKH SHEET METALS COMPONENTS VERSUS UNION OF INDIA & ORS. [2020 (6) TMI 385 - DELHI HIGH COURT]

“We have time and again made adverse remarks on the procedural working of the GST system in several decisions. We may just add that we do not derive any pleasure when we make such observations, as comments of the Court affect the reputation of the administration in the country. Such remarks are made only when we are constrained to do so. The case before us is one where there is a complete lack of understanding and fairness on the part of the Tax Department. The fact that Respondents have done nothing to solve the problem faced by the Petitioner, fueled with the adamant stand before us, contributes to scepticism of GST technical infrastructure, which we feel should and can be easily avoided. Only if Respondents were to engage with the taxpayers with a genuine intention to solve the problems, confidence in the system can be built up and such matters would not reach courts".

The problem is government doesn’t trust businessman, on the contrary side, the businessman does not have choice but to follow the changes made in GST Laws.

By CA Archana Jain & CA Navjot Singh

TaxTru Business Advisors LLP

Authors may be reached at contact@taxtru.in