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December 25, 2020

New Rule introduced which restricts amount available in electronic credit ledger under GST

by CA Shivam Jaiswal in GST

New Rule introduced which restricts amount available in electronic credit ledger under GST

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

What do you mean by the Electronic Credit Ledger?

The electronic credit ledger reflects the amount of Input Tax Credit available to the taxpayer. Thus, every claim of input tax credit of the registered taxpayer eligible for claiming such a credit is credited to this ledger. The amount available in the electronic credit ledger is utilized in making payments towards outward tax liability by the registered taxpayer.

Insertion of new Rule 86B

The Central Board of Indirect Taxes and Customs (CBIC) has introduced Rule 86B in GST rules which restricts use of input tax credit (ITC) for discharging GST liability to 99%.

The Rule states that, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of 99% of tax liability, in cases where the value of taxable supply in a month exceeds Rs 50 lakh.

Who will this Rule be applicable to?

Businesses with monthly turnover of over Rs 50 lakh will have to mandatorily pay at least 1% of their GST liability in cash. Rs 50 lakhs limit to be checked for each month. This Rule was introduced to curb evasion by fake invoicing.

While calculating the turnover threshold, sales from GST exempt goods and zero rates supply would not be included.

When shall this Rule not be applicable?

This rule is not applicable in the following cases:

  • Where the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than Rs 1 lakh as income tax in each of the last two financial years for which the time limit to file return of income under section 139(1) has expired; or
  • Where the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub- section (3) of section 54; or
  • Where the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub- section (3) of section 54; or
  • where the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or
  • the registered person is –
    1. Government Department; or
    2. a Public Sector Undertaking; or
    3. a local authority; or
    4. a statutory body:

The Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.

For instance, In the FY 2020-2021, up to November 2020, output tax liability comes to Rs 20 lakh and taxpayer deposited Rs 22,000 in cash up to Nov 2020 then this rule is not applicable

Further amendments provided by CBIC

  • The CBIC also amended GST rules restricting filing of outward supply details in GSTR-1 for business that did not pay tax for the past periods by filing GSTR 3B.
  • Till now, non-filing of GSTR 3B resulted in blockage of e-way bill, but the same would now result in GSTR 1 blockage as well.
  • The CBIC has also notified authentication of Aadhaar number or physical verification of business premises for the purposes of obtaining GST registration.
  • Also, the validity of electronic way bill provisions has been amended by the CBIC according to which the e-way bill will be valid for 1 day for every 200 km of travel, as against 100 km earlier.

The notified measures would help tackle menace of fake invoices for availing and passing on of input tax credit (ITC) by fraudsters. Collectively these steps are likely to control dummy registrations and fake billing for ITC to take GST process towards a cleaner and robust regime.

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