The Central Board of Indirect Taxes and Customs (CBIC) introduced Rule 86B via Notification No. 94/2020 on December 22, 2020, effective from January 1, 2021. Here’s a comprehensive overview of Rule 86B, emphasizing its impact on the utilization of Input Tax Credit (ITC) and associated guidelines.

Key Updates and Amendments:

• Under Section 38, ITC is not claimable if restricted in GSTR-2B.
• Revised time limit for claiming ITC on invoices: must be done by either November 30 of the following year or the annual return filing date, whichever comes first.
• Section 38 now centers on 'Communication of details of inward supplies and ITC', aligning with Form GSTR-2B for ITC claim procedures and restrictions, eliminating the two-way communication process from the suspended Form GSTR-2.
• Section 41 introduces self-assessed ITC claims with conditions, removing provisional claims.
• Sections 42, 43, and 43A, concerning provisional ITC claim processes and reconciliations, are removed.
• The amendment to CGST Rule 36(4) eliminates the provision for claiming an additional 5% ITC over what appears in GSTR-2B effective January 1, 2022.

Understanding Prior ITC Utilization:
ITC traditionally was pivotal in GST for preventing double taxation, fully utilizing the electronic credit ledger to settle output tax liabilities. However, Rule 86B restricts ITC usage for output tax settlement.

Limitations Imposed by Rule 86B:
Rule 86B limits the use of ITC from the electronic credit ledger for output tax liabilities, superseding other CGST Rules. It applies to entities with monthly taxable supplies exceeding Rs. 50 lakh, excluding exempt and zero-rated supplies.

• These entities cannot apply ITC beyond 99% of their output tax liabilities.

Exemptions to Rule 86B:

• Entities or individuals who paid over Rs. 1 lakh in income tax under the Income Tax Act, 1961.
• Entities receiving refunds exceeding Rs. 1 lakh in prior financial years from exports under LUT or inverted tax structures.
• Entities paying more than 1% of their current financial year’s output tax liabilities via electronic cash ledger.
• Certain organizations like government departments, PSUs, local and statutory authorities.

Impact on Businesses:
Rule 86B notably affects large taxpayers, introducing measures to tackle fake invoicing and fraudulent ITC claims. This control aims to deter high turnover reporting without financial substance. While micro and small businesses remain unaffected, the emphasis is on combating tax evasion and securing credible tax processes.

Example Illustration:
Consider Mr. A, a taxpayer with Rs. 1 crore in sales at a 12% tax rate. Under Rule 86B, Mr. A can clear 99% of his tax liability through ITC, requiring Rs. 12,000 payment in cash. Despite inconveniences to genuine taxpayers, the rule aims to curb fictitious invoicing and tax evasion.

*[SEBI]: Securities and Exchange Board of India

*[PAN]: Permanent Account Number