Understanding Rule 86B of the CGST Act: Impact and Implications
CA Vishal Agarwal
CA Vishal Agarwal is a highly skilled and dedicated Chartered Accountant with extensive expertise in Goods and Services Tax (GST). With years of experience in the field, he has established himself as a trusted advisor to businesses and individuals across multiple locations in Bihar. His deep understanding of GST regulations, compliance, and advisory services has helped numerous clients navigate the complexities of taxation with ease and confidence.
Introduction
The Goods and Services Tax (GST) has streamlined India’s indirect tax system, bringing uniformity and efficiency. However, the government introduced Rule 86B under the Central Goods and Services Tax (CGST) Rules to prevent tax evasion and fraudulent tax practices. This rule, which took effect on January 1, 2021, limits the use of input tax credit (ITC) for offsetting tax liability. The main objective of this provision is to ensure that businesses contribute a minimum amount of tax in cash, thereby preventing excessive dependence on ITC.
Understanding Rule 86B
Rule 86B states that taxpayers whose taxable turnover exceeds Rs. 50 lakhs in a given month cannot use ITC to discharge more than 99% of their total tax liability. In other words, at least 1% of the tax liability must be paid in cash. This restriction aims to reduce instances in which businesses fraudulently claim ITC and avoid making cash tax payments.
Who is Affected by Rule 86B?
This rule applies to registered persons with monthly taxable supplies exceeding Rs. 50 lakhs, meaning it primarily affects medium to large businesses. However, the rule also includes exceptions, ensuring genuine businesses are not unnecessarily burdened.
Exemptions Under Rule 86B
Several exemptions under Rule 86B allow businesses to be exempt from this restriction:
- Taxpayers who have paid more than Rs. 1 lakh in income tax over the last two financial years are exempt.
- Businesses that have received a refund exceeding Rs. 1 lakh in the preceding financial year due to an inverted duty structure or export refunds are exempt from this rule.
- Government departments, public sector undertakings (PSUs), local authorities, and statutory bodies are exempt.
- If the taxpayer’s proprietor, managing director, or any partner has paid an income tax of at least Rs. 1 lakh in the last two years, the restriction does not apply.
- If the registered taxpayer has cumulatively discharged more than 1% of the total tax liability in cash in the current financial year, the rule does not apply.
Objectives of Rule 86B
The introduction of this rule serves several key purposes:
- Preventing ITC misuse: Some businesses were exploiting loopholes to evade tax payments by using ITC from fake invoices.
- Boosting government revenue: By enforcing a minimum cash tax payment, the government ensures consistent revenue collection.
- Encouraging compliance: The rule discourages fraudulent practices and incentivizes businesses to adhere to tax regulations.
Challenges and Criticism
Despite its advantages, Rule 86B has faced criticism from the business community:
- Cash flow burden: Many businesses, especially small and medium enterprises (SMEs), argue that mandatory cash payments affect their liquidity.
- Administrative complexity: Businesses need to carefully track tax payments and exemptions, adding to compliance costs.
- Impact on genuine taxpayers: Some legitimate businesses may encounter unnecessary restrictions despite maintaining compliant tax records.
- ITC blockage: Companies with legitimate ITC claims may experience cash-flow issues due to restrictions on ITC utilization.
Compliance and Practical Implications
To comply with Rule 86B, businesses must:
- Regularly monitor monthly taxable turnover to determine applicability.
- Ensure proper record-keeping of ITC utilization and cash payments.
- Check for eligibility under exemptions to avoid unnecessary compliance.
- Use the GST portal to track cash liability and make necessary adjustments.
Conclusion
Rule 86B of the CGST Act is an important step towards strengthening the GST system and curbing tax fraud. While it enhances transparency and ensures tax collection, it also presents challenges for businesses. By balancing compliance with practical business needs, the government can ensure that Rule 86B achieves its intended objectives without hampering legitimate taxpayers. Moving forward, periodic reviews and modifications based on stakeholder feedback could further enhance its implementation.
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