Rule 86B of CGST Act – Restriction on utilisation of Electronic Credit Ledger Balance

Rule 86B of CGST Rules

(Restrictions on utilisation of Electronic Credit Ledger Balance)

What is rule 86B?

• There are 2 ways of paying the GST Tax Liability on Sales made – through e – cash ledger or through e – credit ledger:

• All the ITC that we claim for a month will be first accumulated in the e – Credit Ledger
• All the cash payments that we make to the GST department will be accumulated in the e – Cash Ledger
• While filing 3B the balance in cash & credit ledgers will get utilized 

• The rule 86B says that, while paying output tax liability (GST Payable on sales made) of certain businesses for a month, the balance of e – credit ledger shall be utilized only up to 99% output tax liability
• It means that the balance liability of 1% should mandatorily be paid in cash (through e-cash ledger)
• Example: if the output tax liability for the month is Rs.150000/- , on that 1% Rs.1500/- should be paid in cash even if there is sufficient balance in the electronic credit ledger.

When will this rule become applicable?

•  The rule is applicable from 1^st January 2021 (it means that for all returns filed for the Tax Period from Jan’2021 – should follow this rule)

To whom is this rule applicable?

• The rule was applicable to all the assessee whose taxable outward supply exceeds Rs. 50lakhs during the month
• Note: Outward supply during the month excludes exempt supply and zero rated supply

My Taxable Outward Supply varies for each month – how is the rule applicable to me?

The rule’s applicability needs to be checked monthly (i.e., if the taxable outward supplies exceed Rs. 50 Lacs for a month then the rule is applicable for the month, if it doesn’t then the rule is not applicable)

An Illustration is given below:

Months (Year 2021)	Taxable outward supply (Rs.)	Whether rule 86B is applicable for that month’s GSTR-3B?
January	52 lakhs	
February	48 lakhs	
March	56 lakhs	
April	50 lakhs	

Is it not applicable to everyone whose taxable turnover is more than 50 lacs?

No, There are additional exceptions to this rule:

• The registered person or the proprietor or karta or the MD or any 2 partners/Whole Time Directors has paid more than Rs.1 lac as income tax in both the last 2 years for which IT Return due date has expired
• For the current financial year, the Liability paid through e-Cash Ledger (till the current month) is more than 1% of the Output Tax Liability (till the current month). Eg: for FY 21-22 upto Jun 2021, the output tax liability is Rs 10 lakh and taxpayer deposited Rs 10,000/- in cash up to till Jun’21 then this rule shall not applicable
• The registered person has received the refund of the amount greater than Rs.1 lakh in the preceding financial year on the account of export under letter of undertaking or due to inverted tax structure or
• The rule is not applicable to a government department or Public sector undertaking or Local authority or Statutory authority

Illustration:

• Taxable turnover during January 2021=Rs.60 lacs
• Applicable rate=18%
• Thus the amount of tax=Rs.10,80,000 (60 lacs*18%)
• Balance available in e – credit ledger is Rs.11 lacs

Particulars	Before implementation of rule 86B	After implementation of rule 86B
Output tax liability for the month	Rs. 10,80,00	Rs. 10,80,000
Electronic credit ledger balance (including current month ITC)	Rs. 11,00,000	Rs. 11,00,000
Maximum output tax allowed to set off	Rs. 10,80,000(Entire Amount of Output)	Rs. 10,69,200 (99% of Output of Rs. 10.8 lacs)
Electronic credit ledger balance (after set off)	Rs. 20,000(11,00,000-10,80,000)	Rs. 30,800(11,00,000-10,69,200)
Liability to be paid in cash	Rs. 0	Rs. 10,800(10,80,000*1%)

What is the purpose of this rule?

The rule is intended to curb fake invoicing since the taxpayer has to pay at least 1% of the liability in cash and also to increase the cash flow to the government.

Summary

From Jan’21 onwards, if your taxable outward supplies value for a month is more than Rs. 50 lacs, then for that month, you have to pay at least 1% of your tax liability in cash (even if you have sufficient credit balances).

However, if you have paid more than Rs. 1 lac as income tax in both the last 2 FY for which IT Return due date has lapsed or if you have paid more than 1% of the output tax liability till the current month in cash, then this rule is not applicable to you.