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Recenty, Central Government has started a major drive to catch GST fraudesters, specially those, who are dealing in Sale-Purchase of Invoices without making any supply of goods or services. Undoubtedly, the government has found many such fraudesters doing such business of Crores (INR) and put them behind the bars.

Moving forward with this, government brought one more provision to put an obligation on GST registered persons to settle their output liability in cash to the tune of 1% of such liability. In this article, we will discuss the same.

Central Government through CBIC, has issued a Notification No. CGST Notification-94/2020 dated 22/12/2020 to amend CGST Rules 2017. By this, it brought a new Rule No. 86B under “Chapter IX- Payment of Tax”. The Rule 86B is titled as “Restrictions on use of amount available in electronic credit ledger”. The provision has been made applicable w.e.f. 1st January 2021 (01/01/2021).

As per this rule, with effect from 01/01/2021, A registered person can use the amount of Input Tax Credits (ITC) for settlement/payment of Output Tax Liability only upto 99% of such liability. Balance 1% to be paid other than ITC, i.e. to be paid in cash.

Even though a person has ITC more than its tax liability, he has to pay 1% GST mandatory in cash.

As per Section 2(82) of CGST Act, 2017, “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis.

Applicability of Rule 86B

Rule 86B is applicable only when a Registered person has taxable supply in a month exceeding Rs 50 Lakh.

Taxable Supply shall not include Exempt Supply and ZERO Rated Supply.

This rule provides for monthly threshhold of Rs 50 Lakh. Till date, there is no provision with Monthly threshhold under GST laws. This is an exception to the same.

Absurdity in application of provisions of Rule 86B

A question arises here that whether or not:-

  • This rule will be applicable only for that month in which turnover surpassed threshhold limit; or
  • This rule would be applicable for each month from a month in which turnover surpassed threshhold limit; or
  • This rule would be applicable on the basis of previous financial year.

Exceptions to Rule 86B

The provisions of Rule 86B shall not be applicable in following cases:-

Where Income Tax Paid for more than Rs 1 Lakh in each of two previous years:-

Where any of following persons have paid more than one lakh rupees as income tax under the Income-tax Act, 1961 in each of the last two financial years :-

  • Registered person himself or
  • the proprietor or
  • karta or
  • the managing director or
  • any of its two partners,
  • any of its two whole-time Directors,
  • any of its two Members of Managing Committee of Associations or Board of Trustees,

Last Two financial years to be taken for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired.

Where GST Paid in cash cumulatively for more than 1% of Total Output Liability till latest Tax Period:-

Where 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.

e.g. In Financial Year 2020-21, upto the month of November 2020, a person has paid GST in cash of Rs 2 Lakh out of Total Output Liability of Rs 1 Crore (i.e. 2% till November 2020).  During the month of December 2020, GST output Liability is Rs 10 Lakh. Now his total payment in cash is Rs 2 Lakh out of Rs 110 Lakh liability (i.e. 1.82%) which is still more than 1% of Total output liability. Here, the person can settle all his liability of Rs 10 Lakh of December 2020 with Input Tax Credits.

Where GST Refund claimed against “Zero Rated Supplies without payment of GST”:-

Where 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.

Clause (i) of first proviso of sub-section (3) of section 54 deals with Refund of GST in case of zero rated supplies made without payment of tax;

Where GST Refund claimed under “Inverted Duty Structure refund Scheme”:-

Where 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.

Clause (ii) of first proviso of sub-section (3) of section 54 deals with refund where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.

Where the Registered person is :-

(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii)a local authority;or
(iv) a statutory body:

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