Introduction

Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017 was introduced by the Government to curb fraudulent availment and utilization of Input Tax Credit (ITC). The rule places a restriction on the use of ITC for discharging GST liability in certain cases and mandates payment of a portion of GST liability in cash.

Although Rule 86B has been in force since 1 January 2021, many taxpayers still face confusion regarding its applicability, exemptions, and practical implications.

This article provides a comprehensive understanding of Rule 86B, its applicability, exceptions, and compliance requirements.

What is Rule 86B?

Rule 86B restricts the use of Input Tax Credit available in the Electronic Credit Ledger.

Where the rule applies, a registered person cannot use ITC to discharge more than 99% of the output tax liability. In other words, at least 1% of the GST liability must be paid through the Electronic Cash Ledger.

The objective is to ensure that businesses with substantial turnover maintain a minimum level of cash payment while preventing misuse of fake invoices and fraudulent ITC claims.

Applicability of Rule 86B

Rule 86B applies where:

The taxable value of supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a month.

If the taxable turnover during a particular month exceeds ₹50 lakh, the taxpayer must examine whether Rule 86B is applicable.

Example

Normally, the entire GST liability can be paid through ITC. However, if Rule 86B applies:

Minimum cash payment required:

₹14,40,000 × 1% = ₹14,400

Maximum ITC utilization:

₹14,40,000 – ₹14,400 = ₹14,25,600

Therefore, at least ₹14,400 must be paid through cash.

Important Clarification

The ₹50 lakh threshold is to be checked month-wise.

A taxpayer may be covered under Rule 86B in one month and may not be covered in another month depending upon the taxable turnover during that month.

Cases Where Rule 86B Does Not Apply

The Government has provided several exemptions to genuine taxpayers.

Rule 86B shall not apply if any one of the following conditions is satisfied:

1. Income Tax Payment Exceeds ₹1 Lakh

The rule does not apply where:

• The proprietor, karta, managing director, or any whole-time director; or

• Any partner of the firm; or

• Any member of the managing committee of an association or trust

has paid income tax exceeding ₹1 lakh in each of the last two financial years for which the due date of filing return under Section 139(1) has expired.

2. Refund Received on Export or Inverted Duty Structure

The registered person has received refund amount exceeding ₹1 lakh during the preceding financial year on account of:

• Export under LUT/Bond without payment of tax, or

• Inverted duty structure.

3. Cash Payment of More Than 1% in Earlier Periods

Rule 86B does not apply where the taxpayer has cumulatively discharged output tax liability through the Electronic Cash Ledger in excess of 1% of the total output tax liability up to the said month in the current financial year.

4. Government Departments and Public Sector Undertakings

The restriction does not apply to:

• Government Departments

• Public Sector Undertakings (PSUs)

• Local Authorities

• Statutory Bodies

Illustration of Exemption

A company has taxable turnover of ₹1 crore during June.

GST liability is ₹18 lakh.

Even though turnover exceeds ₹50 lakh, Rule 86B will not apply if:

• The Managing Director has paid income tax exceeding ₹1 lakh in each of the last two assessment years; or

• The company received export refund exceeding ₹1 lakh in the preceding financial year; or

• The company already discharged more than 1% of GST liability in cash during the current financial year.

In such cases, the entire GST liability can be paid using available ITC.

Key Compliance Points

Maintain Income Tax Records

Businesses should maintain proof of income tax payments of eligible persons to establish exemption eligibility.

Monitor Monthly Turnover

The ₹50 lakh threshold must be checked every month.

Review Cash Payment Ratio

Taxpayers should monitor cumulative cash payments under GST throughout the financial year to determine whether exemption is available.

Maintain Proper Documentation

Proper documentation should be maintained regarding:

• Income tax payments

• GST refunds received

• Cash tax payments

• Turnover calculations

This will be useful during departmental audits or scrutiny.

Common Mistakes Made by Taxpayers

Mistake 1: Considering Annual Turnover

Rule 86B is triggered based on monthly taxable turnover and not annual turnover.

Mistake 2: Ignoring Available Exemptions

Many taxpayers unnecessarily make cash payments without checking whether any exemption applies.

Mistake 3: Including Exempt Supplies

The ₹50 lakh threshold should be checked based on taxable supplies. Exempt supplies and zero-rated supplies are excluded for this purpose.

Mistake 4: Not Tracking Cumulative Cash Payments

Taxpayers often overlook the exemption available based on cumulative cash payment exceeding 1% of total output tax liability.

Practical Impact on Businesses

For genuine businesses, Rule 86B generally has limited impact because most established entities qualify for one or more exemptions.

However, newly formed businesses, entities with low income tax history, and businesses having substantial ITC balances should carefully evaluate compliance requirements before filing GST returns.

The rule primarily targets suspicious transactions and fraudulent ITC utilization while ensuring a minimum level of tax payment through cash.

Conclusion

Rule 86B is an anti-tax evasion measure that restricts utilization of Input Tax Credit in specific high-turnover cases. While the rule mandates a minimum cash payment of 1% of GST liability, several exemptions have been provided to genuine taxpayers.

Businesses should review their turnover, income tax payment history, refund status, and cumulative cash payments before determining applicability. Proper understanding of Rule 86B can help avoid compliance issues and ensure smooth GST return filing.

CA SATYA RAJU KALLA
FCA, LLB, B.Com, DISA, Peer Reviewer (ICAI)
https://linktr.ee/casatyaraj

RAJU & RAJESH
Chartered Accountants
Rajamahendravaram

📞 9177444411
📧 satyaraju@rajurajesh.com