Rule 86B Under GST: Restrictions on ITC Utilization Explained
GST compliance is a crucial aspect for businesses in India. Rule 86B under GST restricts the use of Input Tax Credit (ITC) to pay more than 99% of output tax liability. This blog provides a detailed, SEO-friendly, and easy-to-understand explanation of Rule 86B with practical examples and FAQs.
What is Rule 86B Under GST?
Rule 86B states that if a taxpayer’s taxable turnover exceeds ₹50 lakh in a month, they cannot use ITC to pay more than 99% of their GST liability. This means at least 1% of tax liability must be paid in cash.
Exceptions to Rule 86B
- Income Tax Payment: If the taxpayer or key managerial persons have paid ₹1 lakh or more in income tax in the last two years, Rule 86B does not apply.
- GST Refund: If the business has received an ITC refund exceeding ₹1 lakh in the last financial year, it is exempt.
- Minimum 1% Cash Payment: If the taxpayer has already paid 1% of cumulative tax liability in cash in the current financial year, Rule 86B does not apply.
- Government Entities & PSUs: Public sector undertakings (PSUs), government departments, and local authorities are exempt.
Examples of Rule 86B Application
Example 1: Rule 86B Applies
ABC Traders has a taxable turnover of ₹60 lakh in a month with an output GST liability of ₹10 lakh. Since Rule 86B applies, they must pay at least ₹10,000 in cash.
Example 2: Rule 86B Does Not Apply (Income Tax Condition)
XYZ Pvt. Ltd. has a taxable turnover of ₹55 lakh. Since the company's MD has paid ₹1.5 lakh as income tax in the last two years, they are exempt from Rule 86B.
Example 3: Rule 86B Does Not Apply (Refund Condition)
DEF Exports received an ITC refund of ₹1.2 lakh in the last financial year. This makes them exempt from Rule 86B.
Example 4: Rule 86B Does Not Apply (Government Entity)
ABC PSU is a government entity and is automatically exempt from Rule 86B.
Impact of Rule 86B on Businesses
- Increased Compliance Burden: Businesses need cash flow to comply with the 1% cash payment requirement.
- Reduced ITC Liquidity: ITC cannot be fully utilized, affecting working capital.
- Stricter Tax Administration: The rule helps prevent fake ITC claims.
FAQs on Rule 86B
1. Does Rule 86B apply to all taxpayers?
No, it applies only if the monthly taxable turnover exceeds ₹50 lakh.
2. Can a taxpayer use ITC to pay the entire GST liability?
No, at least 1% of the tax liability must be paid in cash.
3. Can the restriction under Rule 86B be removed?
Yes, the Commissioner has the power to remove the restriction after verification.
Conclusion
Rule 86B under GST is a crucial measure to prevent ITC fraud and ensure compliance. Understanding its applicability and exceptions can help businesses manage their tax payments efficiently.
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