Unveiling GST Rule 86B: Navigating Restrictions on ITC Utilization

In the ever-evolving landscape of taxation, it's crucial for businesses to stay up-to-date with the latest amendments and regulations. One such recent addition to the Goods and Services Tax (GST) framework is Rule 86B, which introduces restrictions on the utilization of Input Tax Credit (ITC) available in the electronic credit ledger. This rule, while aiming to curb fraudulent practices and revenue leakage, also brings forth new challenges for businesses. In this blog, we delve into the key aspects of GST Rule 86B and its potential implications.

Understanding Rule 86B:

GST Rule 86B was introduced to prevent unscrupulous practices of misusing ITC to evade taxes and improve compliance. The rule primarily restricts the use of ITC for discharging GST liability to a certain percentage of the total liability. As per the rule, a registered person cannot use more than 99% of the ITC available in their electronic credit ledger to offset their GST liability. In simpler terms, businesses are now required to make a minimum cash payment of 1% of the GST liability.

Implications for Businesses:

While the intention behind Rule 86B is to promote honest tax practices, it also poses challenges for businesses, especially those with substantial ITC balances. Here's a closer look at the implications;

Cash Flow Impact:

Businesses accustomed to using their entire ITC balance to offset GST liability might experience a strain on their cash flows due to the mandatory 1% cash payment. This could particularly affect industries with high-value transactions and considerable GST liability.

Compliance Complexity:

The implementation of the rule requires businesses to calculate the eligible ITC that can be utilized for payment. This could add to the compliance burden, necessitating accurate record-keeping and periodic reconciliations.

Strategic Planning:

Companies may need to re-evaluate their tax planning strategies to strike a balance between maximizing ITC utilization and ensuring compliance with the new rule. Adjustments in procurement, invoicing, and supply chain management might be necessary.

Exceptions to the Rule:

It's important to note that Rule 86B comes with certain exceptions. The restrictions on ITC utilization do not apply if:

The value of taxable supplies (other than exempt supplies) and zero-rated supplies in a month exceeds 1 crore rupees.

The registered person has paid more than 1 lakh rupees as income tax under the Income Tax Act, 1961, in each of the last two financial years.

The registered person has received a refund amounting to more than 1 lakh rupees in the preceding financial year on account of unutilized ITC due to zero-rated supplies without payment of tax.

Conclusion:

GST Rule 86B introduces a paradigm shift in how businesses can utilize their available ITC to discharge GST liability. While aimed at curbing tax evasion, it's vital for businesses to grasp the rule's implications and adapt their strategies accordingly. The need for a balanced approach between maximizing ITC utilization and complying with the 1% cash payment requirement is now more critical than ever. As the GST landscape continues to evolve, businesses should keep a watchful eye on further updates and amendments that might impact their operations.