Recently, with a view to curb the fake invoicing practice prevailing under GST, the Government imposed a new restriction (CBIC Notification No. 94/2020) on full utilization of input tax credit (ITC) towards payment of output tax liability.
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The present article briefly explains the new restriction on ITC and its relevant effect on small, medium and large businesses.
Restriction on ITC acquaint via rule 86B
The Central Board of Indirect Taxes and Customs, vide notification no. 94/2020- Central Tax dated 22nd December 2020, came up with the Central Goods and Services Tax (Fourteenth Amendment) Rules, 2020.
The said amendment rules introduced various significant changes, one of them was the insertion of rule 86B to the Central Goods and Services Tax Rules, 2017.
The newly inserted rule 86B is significant in as much as the same restricts the full utilization of the amount available in the electronic credit ledger towards payment of output tax liability.
The provisions of rule 86B are simplified and explained (With Example)
- The rule applies to all the registered person having the value of taxable supply (other than exempt supply and zero-rate supply) more than INR 50 Lakhs in a month.
- If the rule gets applicable, the registered person will be permitted to pay a maximum 99% of output tax liability via electronic credit ledger.
In other words, the registered person, despite having sufficient balance in electronic credit ledger, will have to pay 1% of the output tax liability via electronic cash ledger.
The restriction will be clearer by going through the below example
Value of taxable supply (other than exempted and export supply)
Total output tax liability payable @ 18%
Credit available in the electronic credit ledger
Mandatory output tax payable through electronic cash ledger as per restriction imposed via rule 86B
Output tax paid by utilizing amount available under electronic credit ledger
INR 9,406 (i.e. 1% of INR 9,40,608)
INR 9,31,202 (i.e. 99% of INR 9,40,608)
Restriction not applicable as value of taxable supply is less than INR 50 Lakhs
- Importantly, the above restriction is not applicable in the following circumstances-
(1) The month during which the value of taxable supply (other than exempt and zero-rated supply) is less than INR 50 Lakhs.
(2) The registered person or the proprietor/ Karta/ managing director/ any two partners/ whole-time directors/ trustees/ member of managing committee has discharged income tax of more than INR 1 Lakh in each of last two financial years.
(3) The registered person has received a refund, on account of zero-rated supply made without payment of tax or inverted duty structure, of more than INR 1 Lakh in the preceding financial year.
(4) The registered person has cumulatively discharged more than 1% of the total output tax liability via electronic cash ledger.
(5) The person is registered under any of the following categories under GST-
B. local authority;
C. Public Sector Undertaking; or
D. Statutory body.
- Notably, the provisions of rule 86B are effective from 1st January 2021.
The registered person covered under provisions of rule 86B and accordingly restricted from full utilization of electronic credit ledger, is also likely to face the following consequences-
- As per sub-rule (5) to rule 59 of the Central Goods and Services Tax Rules, 2017, such registered person, if fails to furnish Form GSTR-3B for the preceding tax period, will not be allowed to file the details of outward supplies of goods or services or both in Form GSTR-1 or using the IFF (i.e. invoice furnishing facility).
- In case the registered person violates provisions of rule 86B, then, as per powers enforced vide rule 86A, the proper officer can fully block utilization of the input tax credit.
Effect of the restriction on small, medium and large businesses
The introduction of the restriction on full utilization of ITC imposed vide rule 86B created a huge hue and cry amongst the professionals and taxpayers.
However, it is quite important to analyze the effect of the same on the small, medium and large businesses.
Referring to the above provisions of new rule 86B, it clearly states that the same gets applicable only when the turnover (other than exempted and export turnover) of the registered person is more than INR 50 Lakhs.
Note - Hence it can easily be concluded that the small businesses having turnover of less than INR 50 Lakhs a month i.e. annual turnover of less than INR 6 Crores are completely exempted under the rule.
Now, let us analyze the restriction from the view point of large businesses. Such businesses will obviously have a monthly turnover of more than INR 50 Lakhs.
However, in general and putting aside other exemptions, the escape point for the large businesses would majorly be the exemption available towards payment of income tax of INR 1 Lakhs or more in each of the last two financial years.
Here, it is assumed that the businesses being large either the registered person or the proprietor/ any two partners/ Karta/ managing director etc. would be paying income tax of more than INR 1 Lakhs.
Now comes the analysis of restriction from the view point of medium businesses who are having turnover of more than INR 50 Lakhs a month. Medium businesses are the one who is most likely to be affected by the restriction imposed under rule 86B.
Logical reasoning for the same would be that there are more chances of such business not getting covered within the exemption criteria.
Like, say for example, most of such businesses would not be paying higher Income Tax of INR 1 Lakhs and hence would not be exempted from the restriction.