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January 22, 2021

Know all about Businesses with monthly turnover of over Rs 50 lakh will have to mandatory pay 1% of their GST liability in cash

by CA Shivam Jaiswal in Income Tax

Know all about Businesses with monthly turnover of over Rs 50 lakh will have to mandatorily pay at least 1% of their GST liability in cash

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

A new rule 86B was inserted, requiring a certain unique segment of taxpayers to compulsorily discharge at least 1% of their output GST liability in cash. The Central Board of Indirect Taxes and Customs (CBIC) 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.

What will be the effects of inserting Rule 86B on tax evasion?

Typically, the fraudsters tend to illicitly discharge the entire GST liability through ITC available, thus avoiding cash payments.

With this restriction, another check to trace fraudulent taxpayers was introduced by lawmakers considering the increase in daily fake invoicing spams. In a way, this shall ensure curbing mala fide acts and plug revenue leakages in the government’s treasury.

While this compulsory requirement of discharging GST liability of at least 1% through cash appears to be harsh during this time of the pandemic, analysis of these provisions gives a different perspective altogether in the form of exclusions outlined below from these strident compliances. As 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 unutilized input tax credit under clause (i) of first proviso of section 54(3); or
  • Where the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilized input tax credit under clause (ii) of first proviso of section 54(3); 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 November 2020 then this rule is not applicable

The limitation here is given to the taxpayer or his principal officers in a case where either taxpayer or its principal officer has discharged income tax of more than Rs 1 lakh in each of the last two years. This exclusion criterion is extremely significant because:

  • Most of the large corporates would get excluded from this compliance as, more likely than not, these taxpayers or their principal officers would be covered under Rs 1 lakh income tax criteria.
  • Even if a corporate is making losses but if it has a turnover of Rs 6 crore annually, it is likely that it would be paying remuneration more than Rs 9 lakh per annum to the said top management personnel such as managing director, whole-time directors, partners, etc.
  • Thus, these top personnel would simply get covered under Rs 1 lakh income tax criteria, excluding the corporates or firm, i.e., taxpayer from the net of the present new rule.
  • It is beneficial that the lawmakers excluded the genuine bunch from the applicability of this compliance even if the said corporates/ taxpayers are making losses

In June 2020, A Memorandum of Understanding (MoU) was signed between the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC), for data exchange between the two organisations. A collaboration between the department of Income Tax and GST also could be seen in this provision where on the basis of the income tax payment of the taxpayer or its principal officers, relief was granted under GST. The shared data analytics between CBIC and CBDT probably listed the segment of potential fraudsters.

While the intention of the present rule is to single out unlawful taxpayers, a certain bunch of genuine taxpayers may face a cash crunch. ITC may be blocked in cases where there is an accumulation of stock due to the pandemic, for startups not having income tax records, for newly registered exporters who are yet to file their refund claims.

Not many taxpayers would fall under this category as they would ideally be discharging 1% or more of their output liability by cash ledger. Having said this, Taxpayers covered under this category would ideally be engaged in any seasonal commodity business, business of Contractors where Running Invoices are issued, businesses where instance of levy arises very few times in a year, annual Maintenance Contracts business etc.

However, for such cases, the authorities have provided a window by granting power to the commissioner to remove such restrictions after necessary verifications and safeguards. Hopefully, the commissioners would adopt a pragmatic approach and provide relief to genuine taxpayers facing the brunt of these provisions.

However, it is good to see lawmakers being sensitive about the stringent measures and applying new filters by granting relief in cases where income tax is paid by the taxpayer or principal officers.

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