The Central Board of Indirect Taxes and Customs (CBIC) has implemented Rule 86B through notification number 94/2020 dated December 22, 2020. Effective from January 1, 2021, this rule imposes restrictions on the use of Input Tax Credit (ITC) in the electronic credit ledger under the Goods and Services Tax (GST) regime.

Earlier, ITC could be fully used to meet output tax liability. However, Rule 86B limits ITC utilization for this purpose, applying to registered individuals with a taxable supply value exceeding Rs. 50 lakh monthly (excluding exempt and zero-rated supplies). This limit must be verified monthly before return filing.

With this rule, registered persons are prohibited from using ITC beyond 99% of their output tax liability. Essentially, more than 99% of the tax liability cannot be paid using ITC.

There are exceptions: Individuals paying over Rs. 1 lakh in Income Tax under the Income Tax Act, 1961, and certain authorized individuals (like partners or directors) are exempt. Additionally, those who received a refund of over Rs. 1 lakh in the previous fiscal year due to export or inverted tax structure, or those who have paid their output tax liability via the electronic cash ledger over 1% of the total liability in the current year, are also exempt.

This rule targets large taxpayers, aiming to tackle fake invoicing and fraudulent ITC use. The goal is to prevent ITC misuse and curb tax evasion.

Note: The 1% is calculated based on the tax liability and turnover each month.

While this rule might inconvenience genuine taxpayers, it plays a crucial role in ensuring compliance and reducing fraudulent practices.

[NEFT]: National Electronic Funds Transfer
[RTGS]: Real Time Gross Settlement
[IMPS]: Immediate Payment Service
[UPI]: Unified Payments Interface