1. M/s XYZ was served with Show cause notice dated 03 February 2023, alleging that there is contravention of Rule 86B of the CGST Rules, 2017 by the taxpayer during the period 2020 – 21.

2. On the verification of the same, it was found that the Rule 86B was itself not available during the period for which the notice was served.

NOTICEE’S SUBMISSIONS

 The Rule 86B was itself not available during the period for which the notice was served.

1. At the outset, the taxpayer would like to submit that the inquiry initiated by the LD. Proper Officer vide _______________ is itself void-ab-initio as Rule 86B of the CGST Rules was inserted via Notification No. 94/2020 – Central Tax dated 12 December 2020, wherein Point 9 of the said Notification specifically mentioned that Rule 86B will be applicable w.e.f. from 01 January 2021 only. The relevant extract of Notification no. 94/2020- Central Tax dated 12 December 2020 is mentioned for your reference as under:

“9. In the said rules, after rule 86A, with effect from the 1st day of January, 2021, the following rule shall be inserted, namely: –

“86B. Restrictions on use of amount available in electronic credit ledger – ……………”

(Emphasis Supplied)

2. Therefore, as mentioned in Summons/ Notice/ Letter dated ______, the Ld. Proper officer is making an inquiry for alleged contravention of Rule 86B of the CGST Rules, 2017 by the taxpayer during the period 2020 – 21, however, as submitted above the Rule 86B was itself not available during the period for which inquiry is being conducted. Therefore, the said allegation cannot sustain and the inquiry initiated vide Summon/Notice dated 03 February 2023 must be set dropped.

3. Without prejudice to above, the taxpayer submits that to understand the matter, it is imperative to analyse the provisions enumerated in Rule 86B of the CGST Rules, 2017 restricting the use of amount available in electronic credit ledger, thus for ease of reference Rule 86B of the CGST Rules, 2017 is reproduced verbatim for ease of reference as under:

“86B. Restrictions on use of amount available in electronic credit ledger-

Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –

(a) 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 one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or 

(b) the registered person has received a refund amount of more than one lakh rupees 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

(c) the registered person has received a refund amount of more than one lakh rupees 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

(d) 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, upto the said month in the current financial year; or

(e) the registered person is –

(i) Government Department; or

(ii) a Public Sector Undertaking; or

(iii) a local authority; or

(iv) a statutory body:

Provided further that 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.”

(Emphasis Supplied)

4. It is to be noted that the primary objective behind the above Rule is to curb the creation of fake invoices for claiming fraudulent ITC. By mandating a minimum cash payment for output tax liability, the government aims to discourage the generation of fictitious invoices to inflate ITC and evade taxes. Further, the said Rule primarily impacts large businesses with high turnovers. Small businesses with a monthly taxable turnover below Rs. 50 lakh are not affected by the restrictions on ITC utilization. While the rule might increase the cash outflow for some large businesses, it plays a vital role in plugging loopholes and ensuring a more robust and transparent tax system.

Where the taxpayer is falling under any of the condition specified in clause (a) to (e) of the proviso above:

5. That from a plain reading of the Rule 86B ibid, it can be inferred that the taxpayer is not debarred from the utilisation of 100% input tax credit for the payment of output liability in the period 2020 – 21, as the taxpayer falls under the proviso (a) to Rule 86B of the CGST Rules, 2017 as mentioned

6. Further to collaborate the fact that the taxpayer falls under the proviso (a) to Rule 86B of the CGST Rules, 2017, detail of the total Income Tax paid in the last two Y are mentioned in table reproduced below, which exceeds the amount of one lakh rupees, for which the time limit to file the return in the IT Act, 1961 has also been expired – 

S. No.	Financial Year (“FY”)	Member of managing committee of association	Tax Paid (In INR)
1	20XX – 20XX
2	20XX – 20XX

Copy of the Income Tax Return filed by ________, Director of the Company, for Financial Year _____ is marked and enclosed herewith as Annexure – B.

7. Based on the discussions & submissions made supra, it is summarised that the taxpayer shall fall within the exception (a) to the provisions of Rule 86B of the CGST Rules, 2017 and therefore, the restriction imposed by virtue of the said Rule to utilise the input tax credits to the extent of ninety nine percent and pay balance one percent by cash shall not be applicable upon the taxpayer.

Conclusion:

8. In light of the above submissions, it is humbly requested that the inquiry initiated/ SCN issued must be set aside as Rule 86B was not available in the GST law during the period for which inquiry is being initiated by the Ld. Proper Officer, as the taxpayer has not contravened the provisions of Rule 86B of CGST Rules, 2017 and is aptly covered under exception mentioned in proviso to Rule 86B of the CGST Rules, 2017.