GST Rule 86B misconceptions, How Taxpayers are interpreting it wrongly

As per GST Notification number, 94/2020-Central Tax dated 22nd Dec 2020, GST rule 86B has been introduced which has imposed 99% restricted on ITC (Input Tax Credit) available in electronic credit ledger of Registered Person. This means 1% of Output liability to be paid in cash. This restriction is applicable in the case of Registered taxpayers having a monthly turnover of more than Rs. 50 Lakh.

This move is getting a large amount of criticism from the Taxpayers. There is a common myth, that everyone whose monthly turnover is more than Rs. 50 Lakh will fall under this rule. Through this article, let us try to understand the provisions more deeply and understand why these provisions were introduced.

Firstly we need to understand that this rule has been introduced to curb the menace of Fake GST Invoicing. The practice of fake GST invoicing has made the entire GST ecosystem hollow.

Let us understand that who actually will come in clutches of rule 86B and why I am saying that genuine taxpayers will never fall in newly inserted Rule 86B.

For that, we need to understand the exceptions who will never fall in Rule 86B. [Proviso a to d of rule 86B of CGST Rules 2017]

Rule 86b exceptions

1. The Taxpayer/ Karta/ Director/ Partner has paid an Income Tax exceeding Rs, 1 lakh in two preceding financial years.
2. The Taxpayer has received a refund under Section 54 exceeding ₹1 lakh in the preceding financial year.
3. The Taxpayer has paid outward tax liability in cash which cumulatively exceeds 1 per cent of total tax liability for the financial year till date.
4. The restrictions shall not apply to the following categories of taxable person:
   • Government department,
   • Public Sector undertaking,
   • Local authority,
   • Statutory body

If you carefully see the exceptions given above, you will realize that a genuine taxpayer will never fall in this rule.

Let us discuss more of this with the help of an example.

One of the registered taxpayers is having an annual taxable turnover of Rs. 10 Cr.  In all 12 months, he is having a monthly taxable turnover of more than Rs. 50 Lakhs. Neither he is engaged in exports or he is having an Inverted supply. Also, neither the Taxpayer/ Karta/ Director/ Partner has paid an Income Tax exceeding Rs, 1 lakh in two preceding financial years. He is claiming that he was never required to pay even 1% of the cumulative total output liability through the cash ledger as GST.

GST Rule 86B misconceptions, How Taxpayers are interpreting it wrongly

In my opinion, the claim of the taxpayer rather seems suspicious.

I am not saying that everyone is wrong. There can be some genuine Taxpayers who are falling in the above-given situation:

1. Startup having a large amount of loss and ITC on amount of huge capital expenditure.
2. Taxpayers who are doing seasonal business or AMCs [Annual Maintenance Contracts]
3. New Professions where billing instances are occasional. [For Example Newly Setup CA Firm]

However, I still believe that an instance of a genuine taxpayer paying tax under section 86B is very low. Even if he has to pay tax, the tax liability will be very low. Just 1% of the Tax Liability.

Now let us understand through a situation how fake billing takes place, to better understand the reason why this rule has introduced

• Company A is a genuine company selling goods to Company B. This is a B2B transaction and Company A issues tax invoice to Company B.
• Company B is having cash sales. Company B makes sales to retail customers, who don’t need a tax invoice. Company B can manipulate it sales and has large amount of ITC.
• Company C is a fake company, involved in Fake GST Billing. Company B shows sale to company C. The Black money of Company B is converted to White and Company B uses it ITC to setoff its Liability. Company B manipulates its sale and never pays ITC in Cash. It also never shows profit in Income Tax.
• Company C also gets ITC and this fake ITC is passed to needy firms by company C.
• Rule 86 has been introduced to curb such practices that have made roots of GST Hollow.

क्या हम GST Rule 86B को सही Interpret कर रहे हैं?

Tags: GST