How much Maximum ITC can be utilized to pay GST liability?

Udaipur CA explains the new ITC utilization rule – taxpayers must now pay at least 1% of output tax liability in cash. Discover how this change affects your business and tax planning.

The central government has added a new rule in the CGST Rules 2017 termed Rule 86B vide No .Notification No. 94/2020-Central Tax dated December 22, 2020 , with the aim to control  fake invoice transactions.  Hence From 1st January 2021, this rule restricts, certain taxpayers to utilize ITC (Input Tax Credit) balance available in the electronic credit ledger on the payment of output tax up to 99 percent. It means at least 1% of their output tax liability (OTL) must be paid by cash.

Applicability of Rule 86B

Rule 86B is attached with a non-obstante clause. This implies that this rule overrides all other rules of GST from the date of its enforcement, i.e. 1st January 2021.

 This rule is applied under the following conditions –

1. The rule applies to GST-registered businesses whose goods in a month have more than 50 lakhs taxable value.
2. The taxable turnover will be exclusive of exempt and zero-rated supply.
3. The taxable turnover can be calculated as – Taxable turnover = Total turnover of the person – (Zero rated + exempted turnover)

Thus It applies to such taxpayers who have monthly value of taxable supplies more than Rs.50 lakh (not being exempt or zero-rated supplies).

Restrictions Imposed by the Rule 86B

The restrictions imposed according to the rule 86B notification are as follows –

1. It limits the use of Input tax credits or ITC in the electronic credit ledger for discharging the OTL.
2. If the registered person has a turnover of more than 50 lakhs in a month, they can only pay 99 percent of their OTL with their ITC.
3. The remaining one percent of the output tax is to be paid in the form of cash.

Example

X a registered businessman makes  a sale of goods valued at Rs 1 crore, and the tax rate on the goods is 14 percent. So as per rule 86B notification, the person is liable to discharge up to 99 percent of his tax liability through ITC and balance  amount of Rs. 14000 must be paid in cash.

Utilization of ITC before the GST Rule

An input tax credit is necessary part to understand before filing of GST Return. After the imposition of Rule 86B, the utilization of the ITC balance towards the amount of output tax liability has been limited. A businessman should necessarily keep in mind for successful running its business with proper tax planning and without blocking the much amount in the working capital. Businessman or companies in the past could use the ITC for the total cost of taxes but now this rule restricts, certain taxpayers to utilise ITC

Rule 86B of CGST rules comes with  the following  exceptions:-

1. Any person mentioned in the list below, who has paid an annual income tax greater than one lakhs rupees under the IT Act of 1961 is exempted from this rule –
   • A registered person
   • Karta of HUF
   • Managing director of the business of the registered person
   • Whole-time directors or any partners (in the case of the firm)
   • Proprietor
2. If a registered person received a refund of one lakh rupees or more in the last financial year, then this refund of unused ITC received towards export under the letter of undertaking or because of an inverted tax structure, will not be accounted for under Rule 86B.
3. When a registered person in question has paid his OTL using the electronic cash ledger of an amount that is more than 1 percent collectively of the entire OTL on the person in the given month in a given financial year.
4. The person is exempted from any tax if they hold any of the following offices –
   • Local authority
   • PSU
   • Statutory authority
   • Government department

Rule 86B will have the following effects on the different types of business:-

1. This new rule will have no impact on small-scale and micro businesses as it has a limit of 50 lakhs which applies only to large taxpayers.
2. The rule will reduce the unethical business practices such as creating counterfeit invoices that are later used for creating counterfeit input tax credits. They then use these fake ITCs to discharge their output tax liabilities.
3. This will also prevent fraudsters from displaying false high turnovers, which would lead to higher financial credibility.
4. The restrictions in the rule will also increase the compliance burden on the taxpayers.

Conclusion

This provision has produced certain issues for legitimate taxpaying large-scale firms that have fallen under the purview of this law. The enterprises typically operate on extremely on very low profit margins due to different business practices and are new to the market. And if a business is taxed under this new law, they must acquire GST Expert Consultant in Udaipur or Udaipur Expert CA.