According to the recent notification of the Central Government, Rule 86B has been inserted under the CGST Rules, 2017 which lays a guideline for the Restrictions on use of amount available in the electronic credit ledger.

This rule states about the imposition of 99% restriction on Input Tax credit that is available in Electronic Credit Ledger of the registered person and remaining 1% of the output liability has to be paid in cash only. This rule shall be applicable as of 1st January 2021 and where the value of taxable supply, exempted supply and zero-rated supply exceeds Rs 50 Lakh in a month.

Exception under this rule

  • This rule shall not be applicable on the person, proprietor, Karta, Managing Director, Whole-time Directors, Members of the board and on those who have paid more than Rs 1 Lakh as income tax in accordance with the provisions of Income Tax Act, 1961 in the last two financial years.
  • Furthermore, the amount of refund received by the registered person of more than Rs 1 Lakh in the form of an unutilized input tax credit in the preceding financial year under Section 54(3) (I) about a refund of tax under CGST Act, 2017.
  • Also, the registered person who has received a number of refunds of more than Rs 1 Lakh in a preceding financial year under Section 54(3) (II) of CGST Act, 2017 that states about the refund of tax.
  • The registered person who has fully discharged his liability upon output tax through the electronic cash ledger for the excess amount of 1% of the total output tax liability, cumulatively applied in the current financial year.
  • The Commissioner or an officer authorized on his behalf may withdraw the above restriction on the verification and safeguards as he deems suitable.

Important Highlights

  • This rule is said to overrule all other existing rules and is mandatory to be followed in every manner which means, it is a non-obstante clause that means this clause empowers the legislation or a provision in which it is enforced and overrule the effects of any other legal provision of any other laws.
  • Under this, if the taxpayer has taxable supply in a month of more than 50 Lakh rupees and annual turnover is more than 6 crore rupees then he shall pay 1% of the tax liability in cash in spite of having a balance in an electronic credit balance.
  • The maximum amount that may be availed by the Input Tax Credit shall be 99% of the total tax liability.
  • This rule is imposed to restrict fake invoicing and asking the taxpayer to pay tax in cash.
  • The taxpayer shall also note that Input Tax Credit availed by him under Section 16 of CGST Rules, 2017 shall be credited to Electronic Credit Ledger and therefore, be used for the payment of output tax according to the restrictions prescribed in Rule 86B.

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