CASH PAYMENT IN LIEU OF INPUT TAX CREDIT IN GST

[Dr. Sanjiv Agarwal]

There has been a major shift in availment of input tax credit (ITC) w.e.f. 01.01.2021 effected vide Notification No. 94/2020-CT dated 22.12.2020. These changes are with reference to new rule 86B making mandatory cash payment of 1 percent and Rule 36(4) of CGST Rules, 2017 providing restrictions on use of amount available in electronic credit ledger. Both these amendments are analyzed in this article.

Mandatory cash payment in lieu of Input Tax Credit [Rule 86B]

Central Government has inserted a new rule in CGST Rules, 2017, Rule 86B, providing for restrictions on use of amount available in electronic credit ledger. This rule shall be applicable from 1^st January, 2020 and has an over-riding effect over other rules. It states that the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. 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. This is subject to certain restrictions and conditions of eligibility.

Salient features of new Rule 86B

Rule 86B (Restriction on use of Input Tax Credit for discharging the output liability) has been inserted into CGST Rules, 2017. The salient features of Rule 86B are as follows-

1. Rule 86B has an overriding impact on any other rule-This rule starts with the non-obstante clause and has an overriding impact on any other provision of the Rules.

2. Rule casts a restriction on use of ITC while discharging output liability-This rule casts a restriction on registered person on use of amount available in electronic credit ledger to discharge liability towards output tax.

3. Applicable on registered persons having value of taxable supply other than exempt supply and zero-rated supply, in a month exceeding fifty lakh rupees-This rule is applicable on the registered person whose value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees. This limit is not be checked with respect to preceding financial year but for each month for which return is being filed. Therefore, in cases wherein turnover of taxable supply would be less than 50 Lakh then this restriction would not be applicable and supposedly in subsequent month, if the turnover exceeds 50 Lakh, then restriction would have to be checked.

4. Output liability cannot be discharged in excess of 99% by utilising Input Tax credit-The said registered persons cannot use Input Tax Credit in excess of ninety-nine per cent of output tax liability.

5. Exceptions carved out for applicability of the Rule

1. Payment of Income Tax of more than one lakh rupees- Rule 86B would not be applicable in cases wherein the persons mentioned hereinbelow have deposited amount of more than one lakh rupees as income tax under the Income-Tax Act, 1961(43 of 1961)–

• The said registered person or
• The proprietor or karta or the managing director of the registered person or
• Any of the two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees of the registered person, as the case may be,

The eligibility check would be made in each of the last two financial years for which the time limit to file return of income under sub-section (1) of section 139 of the said Act has expired.

2. Refund of ITC towards Zero Rated Supplies of Goods or services or both- Rule 86B would not be applicable in cases wherein 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 i.e. zero rated supplies made without payment of tax. It would be apt to highlight that the refund should have been received in the preceding financial year.

3. Refund of Input Tax Credit due to Inverted Duty Structure-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 i.e. Inverted duty structure. It would be apt to highlight that the refund should have been received in the preceding financial year.

4. Cumulative discharge of tax liability of more than 1% during the financial year- Restriction in Rule 86B is not applicable wherein cumulatively upto the said month in the current financial year 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. Therefore, while filing return for each month, taxpayer now has to make keep a track that whether his cumulative discharge of tax liability of output tax through electronic cash ledger is more than 1% upto the month of filing of return.

5. Specified Registered persons-Restriction under Rule 86B is not applicable in cases wherein the registered person is Government Department; or a Public Sector Undertaking; or a local authority; or a statutory body.

6. Commissioner or an office authorized by him empowered to remove the said restriction after such verification-The rule empowers the Commissioner or an officer authorized by him in this behalf to remove the said restriction after such verifications and such safeguards as he may deem fit.

Impact

1. The new rule overrides all other existing rules which implies that this has to be mandatory followed in all cases.
2. Taxpayer shall be mandatorily required to pay 1% of the tax liability in cash despite there being balance in the electronic credit ledger.
3. In other words, the maximum amount which can be availed by way of ITC shall be 99% of the tax liability.
4. However, this will also be not applicable to firm / company whose proprietor or partner or MD or WTD pays more than ₹ 1 lakh as income tax. Since this may be the case in most of the cases, the rule may be sparingly applicable to few only.
5. There will be no relation in case of new businesses
6. The restriction imposed are subject to certain conditions as discussed above.
7. Restrictions imposed by Rule 86B will further increase the compliance burden for the taxpayers

Thus, one percent of the tax liability will always remain unavailed for which refund will also not be granted.

CBIC Clarifications

However, CBIC has clarified that the new rule provides for various exemptions like exporters, suppliers of goods of inverted duty structure, taxpayers having a footprint in the Income Tax data base etc. It is expected that this rule would be applicable to less than 0.5% of total taxpayer base of 1.2 crore. The rule clearly identifies where the risk to revenue is high and imposes deterrence to the fraudsters in a multi-layered fraud of passing fake ITC. This rule would help to control such fraudsters, who issue fake invoices and show high turnovers, but have no financial credibility and flee after misusing ITC without payment of any tax liability in cash.

There is a general perception amongst taxpayers that such a requirement may add to compliance burden and also put a pressure on working capital. However, this one percent requirement is on the tax amount and not that on turnover. CBIC has also clarified that the cash payment of 1% is to be calculated on the tax liability in a month and not turnover of the month. In fact, it amounts to only 0.01 % of turnover. For example, if a dealer has made sale of ₹ 1 crore of the goods whose tax rate is 12% and if he is discharging his tax liability more than 99% through ITC, then he has to pay only ₹ 12,000 under this rule. On the other hand, a composition dealer would have paid ₹ 1 lakh in cash with this volume of sale.

This will also not effect small businesses as it is applicable to the registered person whose value of taxable supply other than exempt supply and export, in a month exceeds ₹ 50 lakh  that means those whose annual turnover is more than ₹ 6 crore. Therefore, the new rule does not apply to micro and small businesses, and Composition dealers.

Further, such 1% requirement is applicable to only those registered persons whose value of taxable supply, other than exempt supply and export, in a month exceeds ₹ 50 lakh that means those whose annual turnover is more than ₹ 6 crore. The new rule is also not applicable in the cases where the registered person has / is :

1. deposited more than ₹ 1 lakh rupees as Income Tax in each of the last two years,
2. received a refund of more than ₹ 1 lakh in the preceding financial year on account of export or inverted tax structure.
3. paid output tax through cash in excess of 1% of the total output tax liability, applied cumulatively, up to the month in the current financial year
4. a government department, PSU, local authority or statutory body

Besides, the registered persons falling in any of the exempted category including paying ₹ 1 lakh as Income Tax in each of the last two financial year or having received refund of more than ₹ 1 lakh in the previous year on account of export or inverted duty structure, etc. are also out of purview of this rule. With these exemptions and conditions and precise targeting, the requirement of mandatory payment of at least 1% of the tax liability in cash would apply only to risky or suspicious taxpayers and genuine taxpayers would remain excluded.

New restrictions for Input Tax Credit (ITC) [Rule 36(4)]

While Section 16 of CGST Act, 2017 provides for eligibility and conditions for taking input tax credit, Rule 36 of CGST Rules, 2017 prescribes documentary requirements and conditions for claiming input tax credit.

Prior to 01.01.2021, Rule 36(4) provided that

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”   

Vide Notification No. 94/2020-Central Tax dated 22.12.2020, various amendments have been made in Rules. Following two amendments have been made in Rule 36(4) of CGST Rules, 2017.

• Return u/s 37(1) has to be furnished, not merely uploaded by the supplier
• The availment of credit to be taken has been restricted to 5% instead of 10% presently.

This change is effective from 1^st January, 2021.

Thus, credit of Input Tax for the invoices not furnished is now restricted to 5% of the tax for invoice details furnished effective from 01.01.2021. Earlier the limit was 10%. Further, now merely the invoices being uploaded would not be sufficient to claim the credit of the input tax. 

The amended rule makes restrictions on ITC being taken stricter by curtailing the percentage of ITC to be taken and linking it to furnishing of GST return in Form GSTR-1. These restrictions are:

ITC claim in respect of invoices which are not uploaded by any vendor in its Form GSTR 1 or through Invoice Furnishing Facility (IFF) will now be allowed maximum upto 5% (currently it is 10%) of the invoices furnished by the vendors in their Form GSTR 1 or IFF Facility.

The new reduced limit of 5% shall be effective from January 01, 2021 i.e., it will apply to all invoices including invoices which are dated or issued on or after January 01, 2021.

It may be noted that the restriction of claiming input tax credit has been varied frequently and can be traced as follows:

Period	Restriction
01.07.2017 to 08.10.2019	NIL
09.10.2019 to 31.12.2019	20
01.01.2020 to 31.12.2020	10
W.e.f. 01.01.2021	5

To illustrate Rule 36(4), suppose a registered person is filing its GSTR-3B for the month of January , 2021, ITC can be claimed as per following table :

S.No.	Activity	Prior to 01.01.2021	W.e.f. 01.01.2021
	Eligible ITC available in the purchase register	1,00,000	1,00,000
	Eligible ITC as per GSTR-2B	80,000	80,000
	ITC to be claimed as a provisional credit	20,000	4,000 (80000*5%)
	Total ITC to be claimed in GSTR-3B	1,00,000 (80000+20000)	84,000 (80000+4000)
	ITC disallowed in GSTR-3B of January , 2021	-	16,000

Impact of Amendment

The 100% Input Tax Credit has to be availed based on invoices / debit notes, details of which have been furnished by the supplier.

In case, such details are not furnished in GSTR-1 by the supplier, then input tax credit can be availed upto 5% of such invoices. This limit is 10% presently but w.e.f. 01.01.2021; this limit will be 5% only. This will result in blocking of credit (funds) to the extent of limit prescribed and result in pressure on working capital of the taxpayer. Such restrictions has been stipulated without any fault or non-compliance of the taxpayer.

Taxable person claiming input tax credit should ensure and prevail upon suppliers to file timely returns.

Conclusion

Looking to both the aforementioned changes, availment of ITC under GST law has become complex and unfriendly for the taxpayers. Apart from affecting the liquidity of the taxpayers adversely to the extent of new restrictions / mandatory cash payment, the changes go against the spirit of GST law itself creating artificial obstancles to the seamless credit.