Restrictive Utilization Of Electronic Credit Ledger

The Central Goods and Services Tax (Fourteenth Amendment) Rules, 2020 were introduced vide notification no. 94/2020- Central Tax dated 22

nd December 2020. The said amendment rules came up with the insertion of new rule 86B to the Central Goods and Services Tax Rules, 2014. The new rule 86B contains provisions restricting the utilization/ use of the amount available in the electronic credit ledger. The present article highlights the applicability; effective date as well as non-applicability of rule 86B.

Applicability of new rule 86B and restriction thereon

Rule 86B is applicable to all the registered person having a monthly value of taxable supply (other than exempt supply and

zero-rated supply) of more than INR 50 Lakhs. Once the rule gets applicable, the registered person cannot utilize the input tax credit in excess of 99% of the output tax liability of the respective month. In other words, the applicable registered person will be required to pay 1% of output tax liability via electronic cash ledger.

The effective date of applicability of restriction

The provisions of newly inserted rule 86B to Central Goods and Services Tax Rules, 2014 will be effective from 1

st January 2021. Accordingly, the restriction imposed on the full utilization of electronic credit ledger will be applicable from 1st January 2021.

Non-applicability of restriction

The restriction imposed vide new rule 86B is not applicable under the following circumstances-

The person registered under any of the following categories under GST-

Government Department; or
A local authority; or
A Public Sector Undertaking; or
A Statutory body.

The registered person satisfying any of the following criteria-

Paid Income tax more than INR 1 Lakhs in each of the last two financial year by-
- The said registered person;
- Proprietor/ Karta/ managing director of the registered person;
- Any two partners/ whole-time director/ board of trustees/ members of the managing committee of the Association of the registered person.
Received refund amount of more than INR 1 Lakhs in preceding financial year on account of-
- Unutilized input tax credit referred under clause (i) of the first proviso of section 54 (3) [zero rated supplies made without payment of tax]; or
- Unutilized input tax credit referred under clause (ii) of the first proviso of section 54 (3) [inverted duty structure].
The taxpayer has discharged more than 1% of total output tax liability via electronic cash ledger for a cumulative period up to a respective month of the current financial year.

Important points

Rule 86B has an over-riding effect over all the other existing rules. Accordingly, the same imposes mandatory compliance of the rule.
Board’s clarification in the matter-
- Rule 86B is likely to be applicable to less than 0.5% of the total GST taxpayers.
- The rule will help to control the fraudulent practice currently prevailing under GST.
- 1% cash payment is to be calculated on the tax liability of the month and not on turnover of the month. Accordingly, the payment amount will be 0.01% of the turnover.
- Rule 86B is applicable only to the taxpayer having monthly taxable supply exceeding INR 50 Lakhs. Hence, the rule will never apply to small businesses as well as composition scheme dealer.
Notably, after proper verification and safeguards, the commissioner (or any authorized officer) can remove the restriction imposed by rule 86B.

Back to Learn

Frequently Asked Questions

Common questions about Rule 86B: Restriction on GST Electronic Credit Ledger Usage.

A: The new rule 86B restricts the utilization of input tax credit (ITC) from the electronic credit ledger. It mandates that registered persons with monthly taxable supplies exceeding INR 50 lakhs must pay at least 1% of their output tax liability through the electronic cash ledger.

A: The provisions of the newly inserted rule 86B under the Central Goods and Services Tax Rules, 2014, came into effect from January 1, 2021. Therefore, the restriction on the full utilization of the electronic credit ledger is applicable from this date.

A: The restriction imposed by rule 86B is not applicable to registered persons such as government departments, local authorities, public sector undertakings, or statutory bodies. Additionally, it does not apply to taxpayers who have paid income tax above INR 1 lakh in the last two financial years or received refunds exceeding INR 1 lakh in the previous financial year under specific conditions.

A: Yes, after proper verification and safeguards, the commissioner or any authorized officer can remove the restriction imposed by rule 86B on a case-by-case basis.

A: The 1% cash payment is calculated on the output tax liability of the month and not on the monthly turnover. Therefore, the actual cash payment will be 0.01% of the monthly turnover.

A: No, rule 86B is applicable only to taxpayers having monthly taxable supplies exceeding INR 50 lakhs. Therefore, small businesses and composition scheme dealers will not be affected by this rule.

A: The primary purpose of introducing rule 86B is to control fraudulent practices currently prevailing under the Goods and Services Tax (GST) regime. According to the Board's clarification, this rule is likely to be applicable to less than 0.5% of total GST taxpayers.

A: Yes, rule 86B has an overriding effect over all other existing rules under the Central Goods and Services Tax Rules, 2014. This means that the mandatory compliance with rule 86B is required for eligible taxpayers.

A: For taxpayers with monthly taxable supplies exceeding INR 50 lakhs, rule 86B restricts the utilization of input tax credit from the electronic credit ledger to a maximum of 99% of their output tax liability. They must pay the remaining 1% through the electronic cash ledger.

A: No, the restriction imposed by rule 86B is not applicable to taxpayers who have discharged more than 1% of their total output tax liability via the electronic cash ledger for a cumulative period up to the respective month of the current financial year.