GST: Restriction on utlization of ITC credit (Electronic Credit Ledger) U/r 36(4) & 86B

 

Please take note of the following important amendments. 

Rule 86B: Restriction on utilization of Electronic Credit Ledger w.e.f. 1st Jan 2021:

The registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of 90% (ninety-nine per cent) of such tax liability. In other words, if this rule is applicable, the registered person must pay a balance of 10% in cash only. It will not affect their cash flow but also their balance in credit ledger will keep on rising and un-utilized.

To whom such restrictions shall apply?

Where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees

To whom such restrictions shall NOT apply?

Though few exceptions have been provided to this rule which are as follows:

(i)        Where the taxpayer has paid Income Tax exceeding Rs. 1 lakh in two preceding financial years.

(ii)       Where a taxpayer has received a refund exceeding Rs. 1 lakhs u/s 54 of CGST Act 2017.

(iii)      Where a taxpayer has used an electronic cash ledger to pay off liability on outward supplies which cumulatively makes 1% of the total liability up to the said month.

(iv)      Where a person is a Government Department, Public Sector Undertaking (PSU), local authority or a statutory body.

To summarise, if your monthly sales is more than 50 lakhs (excluding export and exempted sales) and you have paid income tax less than Rs. 1,00,000/- (Incl. TDS & TCS) in the last two ITR, ITC utilization will be restricted to 90% and balance 10% must be paid in cash. 

Now the question remains: What if my sales in a month is more than 50 lakh for certain months and below 50 lakh in certain months, whether this rule shall apply or not? We shall await for clarification.

What if ITC claimed is more than the eligible amount u/r 86B?

In case a tax payer claims ITC more than the eligible amount, the GST registration shall be liable to suspend u/r 21(e) r.w 21A(2) without any notice or hearing.  

During the suspension, the taxpayer is neither eligible to issue Tax Invoice (Rule 21A(3)) nor generate EWB. (Rule 138E(d))

Rule 36(4) Restriction on claiming ITC towards mis-match w.e.f. 1st Jan 2021:

Rule 36(4) was notified w.e.f. 9th Oct 2019 whereby ITC claimed 3B can not exceed 110% of the ITC reflected in GSTR 2B. 

Now the rule is amended w.e.f. 1st Jan 2021, to reduce eligible amounts to 105%. 

In simple words, if the ITC as per books is say 1,00,000 and as per 2B is 70,000, maximum ITC that can be claimed is 105% of the amount reflected in 2B i.e. 105% of 70,000 = 73,500 only.

What if ITC claimed is more than the eligible amount u/r 36(4)?

In case a tax payer claims ITC more than the eligible amount (i.e. 73,500/- in above case), the GST registration shall be liable to suspend u/r 21(e) r.w 21A(2) without any notice or hearing. 

During the suspension, the taxpayer is neither eligible to issue Tax Invoice (Rule 21A(3)) nor generate EWB. (Rule 138E(d))

 

Recommendations:

The above rules are applicable for the return period Dec 2020 and onwards.

1. In order to avoid any litigation, cost of non-compliances (interest and penalty) and unpleasant sequence of events (like suspension of registration etc.), we strongly recommend to claim ITC only on the basis of 2B as generated on portal on 12th of every month. 
2. We further advise you to approach your vendor and insist them to file their GSTR 1 on or before the due date, else ITC may be deferred. Please note that if the vendor files R1 after 11th, ITC will be reflected in next month