Introduction to GST and Input Tax Credit (ITC):
Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax levied on the supply of goods and services in India. It was introduced on 1st July 2017 to replace a complex system of multiple indirect taxes and bring uniformity in the taxation of goods and services across the country.
One of the key features of GST is Input Tax Credit (ITC). ITC allows a registered taxpayer to claim a credit for the taxes paid on inputs (purchases) that are used in the course of business. In other words, a taxpayer can set off the tax already paid on inputs against the tax liability on output (sales) before making the final tax payment to the government.
Understanding Rule 86B:
To prevent misuse of the ITC mechanism and curb tax evasion, the government introduced Rule 86B under the Central Goods and Services Tax (CGST) Rules, 2017, with effect from a specific date (as mentioned in the official notification). Rule 86B places certain restrictions on the utilization of ITC by registered taxpayers.
Key Points of Rule 86B:
- Applicability: Rule 86B is applicable to all registered taxpayers under GST, regardless of the type of business or turnover.
- ITC Utilization Limit: Under this rule, eligible taxpayers can use ITC to set off their output tax liability up to 99% of the tax liability. In other words, they can use a maximum of 99% of their available ITC for paying their GST dues.
- Mandatory Cash Payment: The remaining 1% of the tax liability must be paid in cash. This provision prevents taxpayers from fully utilizing ITC to discharge their entire tax liability. For instance, if a taxpayer has a GST liability of ₹10,000, they can use a maximum of ₹9,900 from their available ITC, and the remaining ₹100 (1%) must be paid in cash.
- Exemptions: Rule 86B does not apply to certain categories of taxpayers. The government has the authority to specify exceptions to this rule. These exceptions may include categories of taxpayers who have a good compliance record, or any other criteria as deemed fit by the government.
Objective of Rule 86B:
The primary objective of implementing Rule 86B is to prevent tax evasion and discourage the practice of over-reliance on ITC for discharging tax liabilities. By mandating a minimum cash payment, the government aims to ensure that taxpayers contribute a nominal portion of their GST dues through cash, thereby increasing tax collections and promoting better compliance.
Conclusion:
Rule 86B of GST serves as a significant measure to strengthen the tax framework in India. It emphasizes a balanced approach to the utilization of ITC and encourages businesses to comply with their tax obligations by making cash payments towards their tax liabilities. By adhering to this rule, businesses can ensure smoother operations while contributing to the growth and development of the nation’s economy.
Please note that tax laws and regulations are subject to change over time, so it is essential to refer to the latest official notifications and updates from the GST authorities to stay compliant with the current regulations.