Restriction on Use of Amount Available in Electronic Credit Ledger

The Central Board of Indirect Taxes (“CBIC”) having power in Section 164 of the CGST Act, 2017, released a crucial Notification No. 94/2020-Central Tax dated 22nd December, 2020 by which a new Rule 86B of the CGST Rules, 2017, has been inserted.

As per Notification No. 94/2020-Central Tax dated 22nd December, 2020, Rule 86B has been introduced which has imposed 99% restricted on ITC available in Electronic Credit Ledger of Registered Person. In other words, the 1% of output liability is to be paid in cash. This restriction for utilization of ITC is applicable where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds Rs. Fifty Lakh Rupees.

The Rule 86B of CGST Rules
“86B. Restrictions on use of amount available in electronic credit ledger.- Notwithstanding anything
contained in these rules, the registered person shall not use the amount available in electronic credit
ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:
Provided that the said restriction shall not apply where –
(a) 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
(b) the registered person has received a refund amount of more than one lakh rupees in the
preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of
sub-section (3) of section 54; or
(c) the registered person has received a refund amount of more than one lakh rupees in the
preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of
sub-section (3) of section 54; or
(d) 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,
upto the said month in the current financial year; or

(e) the registered person is –
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii)a local authority; or
(iv) a statutory body:
Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said
restriction after such verifications and such safeguards as he may deem fit.”.

Non-applicability of Rule 86B:-
This Rule is NOT applicable in the following cases:-

1. In case where the registered person deposited more than Rs 1 lakh rupees as Income Tax under the
   Income-tax Act, 1961 in each of the last two financial years;
2. In case where registered person has received a refund more than Rs 1 lakh rupees in the preceding
   financial year on account of export under LUT i.e. without payment of tax or Inverted Tax Structure;
3. In case where cumulatively up to the said month in the current financial year registered person has
   discharged his output tax liability in cash which is in excess of 1% of the total output tax liability;
   [Suppose in the Financial Year 2020-2021, up to November 2020, output tax liability comes to Rs 10
   lakh and taxpayer deposited Rs 10,000/- in cash up to November 2020 then this rule is not applicable]
4. This rule not applicable to Govt department, PSU, Local Authority and Statutory Body.

Cancellation of GST Registration: The registration granted to a person is liable to be cancelled, if the said person violates the provisions of Rule 86B. [Rule 21(g)].
Further, as per Rule 59(6)(c) a registered person, who is restricted from using the amount available in electronic credit ledger to discharge his liability towards tax in excess of ninety-nine per cent. of such tax liability under rule 86B, shall not be allowed to furnish the details of outward supplies of goods or services or both under section 37 in FORM GSTR-1 or using the invoice furnishing facility, if he has not furnished the return in FORM GSTR-3B for preceding tax period. Please note that Rule 59(6)(c) has been now omitted vide Notification No. 35/2021-Central Tax, dated 24.09.2021, w.e.f. 01.01.2022.

Author’s Note:

The GST Department have started issuing notices to the registered persons who have made the payment of output tax liability by utilizing more than 99% of Input tax credit. It is advisable to read the applicable provisions of law carefully to avoid unnecessary litigation or take expert help.