Limit on Use of Input Tax Credit Under Rule 86B of the CGST Rules, 2017
This article explains the restriction in Rule 86B on using input tax credit to pay output tax, the monthly threshold that triggers it, and the exceptions in the provisos.
Rule 86B was inserted by Notification No. 94/2020-Central Tax dated 22 December 2020, effective 1 January 2021, mainly to curb fake invoicing and fraudulent claims of credit. It operates month by month, so a registered person above the threshold needs to test every month and, if the restriction applies, plan the cash payment before filing the return.
The restriction
A registered person cannot use the amount available in the electronic credit ledger to discharge more than 99% of the output tax liability in a month, where the value of taxable supplies in that month, excluding exempt supplies and zero-rated supplies, exceeds Rs. 50 lakh. The consequence is that at least 1% of output tax must be paid in cash, even if the credit balance is sufficient to cover the whole liability.
Rule 86B is a limit on how credit may be used. It is not a general requirement that every large assessee pay 1% in cash. Applicability should be determined by testing the monthly threshold first and then each exception in turn.