Rule 86B of the Central Goods and Services Tax (CGST) Rules as introduced in January 2021. While the GST regime was designed to allow a smooth flow of Input Tax Credit (ITC), this rule acts as a specific control mechanism: it restricts certain taxpayers from using their ITC to discharge more than 99% of their output tax liability.
In simple terms, even if you have enough credit in your ledger, you must pay at least 1% of your GST liability out of your own pocket in cash.
Here is a breakdown of everything you need to know about Rule 86B:
Why Was This Rule Created? The government brought in Rule 86B as a strict anti-evasion measure. Its primary target is “fly-by-night” operators and fraudsters who issue fake invoices. These entities create bills without actually supplying any goods or services just to pass on fake ITC, ultimately looting the government treasury without paying any actual taxes in cash.
Who Does It Apply To? It is not applicable to small or micro enterprise. This rule only targets larger taxpayers. Rule 86B is applicable only if the value of your taxable supplies exceeds Rs. 50 lakhs in a single month.
Note: When calculating this 50-lakh threshold, you should not include the value of any exempt or zero-rated supplies (like exports).
How Does It Work in Practice? For example:
- Your Output Tax Liability: Rs. 1,00,000
- Your Available ITC: Rs. 1,00,000 Under normal circumstances, you would pay zero cash. However, under Rule 86B, you are capped at utilizing only 99% of your ITC.
- ITC Utilization Allowed: Rs. 99,000
- Mandatory Cash Payment: Rs. 1,000.
The Exceptions: The government knows that honest businesses shouldn’t be penalized. Therefore, Rule 86B comes with a list of practical exceptions. The 1% cash restriction does not apply to you if:
- You pay solid Income Tax: You, your proprietor, managing director, or key partners have paid more than Rs. 1 lakh in Income Tax in each of the last two financial years.
- You received large GST refunds: You received a GST refund of over Rs. 1 lakh in the preceding financial year due to unutilized ITC from exports (zero-rated supplies) or an inverted duty structure.
- You already paid enough cash: You have cumulatively discharged more than 1% of your total output tax liability in cash up to the current month in the financial year.
- You are a Government Entity: The rule exempts Government Departments, Public Sector Undertakings (PSUs), local authorities, and statutory bodies.
- You trade in Retail Sale Price (RSP) goods: If you are a trader (not a manufacturer) dealing in specific goods like pan masala or tobacco products under Rule 31D, where the tax has already been paid upfront by the manufacturer based on the retail sale price, you are exempt for that specific turnover.
What If a Genuine Business Gets Stuck? Sometimes, honest businesses—like newly launched startups with heavy initial investments, or companies facing persistent losses—might accidentally trigger this rule and face a cash crunch. If your business falls into this trap but you don’t meet the automatic exceptions, there is still a legal way out. You can draft a representation and apply to your jurisdictional Commissioner. After verifying your case, the officer has the statutory power to remove the 1% cash restriction and provide relief.
Final Takeaway While Rule 86B restricts ITC, it is important to remember that it is a control mechanism meant to catch tax evaders, not to harm genuine trade. By understanding the rule’s turnover limits and keeping track of your income tax and refund history, you can leverage the exceptions to fully protect your business’s working capital.