CGST Rule 86B: Restriction on use of amount available in Electronic Credit Ledger

CGST Rule 86B is a new provision that has been introduced under the Goods and Services Tax (GST) Act. This rule aims to restrict the use of electronic credit ledger for the payment of output tax liability. Under this rule, the taxpayers have to mandatorily use a percentage of their available input tax credit (ITC) for the payment of output tax liability. In this article, we will discuss in detail about the CGST Rule 86B, its provisions, and its impact on the small and medium businesses and startup companies in India.

What is CGST Rule 86B?

CGST Rule 86B is a new provision that has been added to the GST Rules through Notification No. 94/2020 – Central Tax dated 22.12.2020. This rule restricts the use of electronic credit ledger for making the payment of output tax liability. According to this rule, taxpayers having an amount of more than Rs. 1 lakh in their electronic credit ledger have to mandatorily use a percentage of their available credit for the payment of output tax liability.

Provisions of CGST Rule 86B

Following are the provisions of the CGST Rule 86B:

Restriction on use of electronic credit ledger: As per this rule, taxpayers can use the electronic credit ledger for the payment of output tax liability only up to 99% of the tax liability. The remaining 1% has to be paid in cash.
Applicability: This rule is applicable to all registered taxpayers who have an amount of more than Rs. 1 lakh in their electronic credit ledger on the last day of the preceding month.
Exemptions: The following taxpayers are exempted from the provisions of this rule:
Government departments or bodies
Public sector undertakings
Local authorities
Statutory bodies
Reset of limit: The limit of Rs. 1 lakh will be checked on the last day of every month. If the amount of credit balance in the electronic credit ledger is less than Rs. 1 lakh on the last day of the month, then the limit will be reset to zero.
Exceptions: The following transactions are exempted from the provisions of this rule and can be paid fully by utilizing the available credit balance:
Credit on account of refund of tax
Credit on account of TDS or TCS

Impact of CGST Rule 86B on small and medium businesses and startup companies

The CGST Rule 86B has been introduced with the objective of curbing the practice of fraudulent input tax credit claims by some taxpayers. However, it has created a lot of confusion and challenges for small and medium businesses and startup companies in India. Here are some of the challenges faced by these businesses:

Working capital crunch: The restriction on the use of electronic credit ledger will result in a working capital crunch for the businesses. They will have to pay a certain percentage of their output tax liability in cash, which will reduce their cash flow and affect their working capital.
Increased compliance: Small and medium businesses and startup companies already face a lot of compliance burden under the GST regime. The introduction of CGST Rule 86B will add to their compliance burden, as they will have to keep a track of their available credit balance and ensure its utilization within the prescribed limit.
Impact on profitability: The restriction on the use of electronic credit ledger will increase the cost of compliance and reduce the profitability of the businesses. They will have to spend more on maintaining their cash balance and managing their working capital.
Difficulty in scaling up: The CGST Rule 86B will make it difficult for the small and medium businesses and startup companies to scale up their operations, as they will have to manage their working capital more efficiently and ensure compliance with the provisions of this rule.

Conclusion

The CGST Rule 86B has been introduced with the objective of curbing the practice of fraudulent input tax credit claims by some taxpayers. However, it has created a lot of confusion and challenges for small and medium businesses and startup companies in India. The government should consider the concerns of these businesses and provide them with some relief from the compliance burden and working capital crunch.