Analysis of GST Rule 86B – Restriction on ITC Utilisation in ECL


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ANALYSIS OF RULE 86B OF THE CGST RULES 2017 – Restriction on ITC Utilisation in Electronic Credit Ledger (ECL)

Applicability & Provision:-

  • Rule 86B is applicable with effect from 01.01.2021 through NN 94/2020 dtd 22nd Dec, 2020.
  • Applicable on taxpayer having turnover > 50 lakhs in a month.
  • Taxpayers covered under this rule are liable to pay at least 1% of the total output tax liability through electronic cash ledger.

Note: Turnover here refers to the Taxable turnover excluding any exempted supply, export with or without LUT.

Note: Reverse charge payments will not be included while calculating such liability.

For e.g.: If any company is supplying goods/services or both in a month forRs. 70,00,000 having tax rate 18%, then, the liability payable through cash ledger shall be Rs. 70,00,000*18%*1%= Rs. 12600.

Non Applicability of Rule in certain cases:-

1. The said person or the proprietor or Karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or

Notes: 

  • Here, income tax payment shall be considered as paid even when paid through deduction of TDS. There is no requirement of payment being made only in cash (incl. bank).
  • When MAT is payable (as per section 115JB) it shall also be construed as Income Tax.
  • The government basically assumes that fake companies might not have paid income tax of more than Rs. 1,00,000/- in last 2 financial years. However, it is imperative to note that income tax of Rs. 1,00,000 would not be a big deal if a fake company is dealing in crores.
  • the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i){stating zero rated supply made without payment of tax} and clause (ii) {where rate of tax is greater than the tax rate on output}of first proviso of sub-section (3) of section 54; or
  • the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or

Notes: –

The said % has to be applied on cumulative basis.

I.e. Tax paid through e cash ledger from start of FY till the month of return filing divided by Total output tax liability till the month of filing return

2. Where registered person is a:

  • Government authority
  • Public sector undertaking
  • Statutory bodies
  • Local authority

When meaning to state that refund in the preceding financial year should be more than one lakh, would the limit be calculated for all refunds taken together?

The limit of Rs.100,000 will be calculated for inverted duty structure and zero rated supplies separately. Thereby, the limit for the exports and supplies to SEZ developer or unit will be clubbed to determine Rs. One lakh but that of the inverted duty structure would be separate.

For example, if refund received for inverted duty structure is Rs. 60,000 and for exports is Rs. 50,000 in a year, the exceptions provided above will not be attracted. However, if the refund for supplies to SEZ had been Rs. 60,000 and for exports Rs. 50,000, the limit would be breached and Rule 86B would not be required to be complied with.

Can registration be cancelled on non-compliance of Rule 86b?

Yes, Rule 21 of the CGST Rules, 2017 has been accordingly amended regarding this that if provisions of Rule 86b are violated then the registration of the taxpayer can be cancelled.


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