FAQ – How is the 1% Cash Payment Requirement under Rule 86B Calculated and Discharged?
Article explains the operation of Rule 86B of the CGST Rules, 2017, under which, subject to prescribed exceptions, a registered person with taxable supplies exceeding ₹50 lakh in a relevant month must discharge at least 1% of output tax liability through the Electronic Cash Ledger and may utilise ITC for the balance up to 99%. RCM liability is excluded from the output tax liability for calculating the 1% requirement and is separately required to be discharged in cash. The ₹50 lakh threshold is tested on taxable supplies for the relevant month, excluding exempt, non-taxable and zero-rated supplies. For the specified cumulative cash-payment exception, cumulative output tax liability and cash payments from April to the relevant month are considered. The material further discusses inadvertent excess ITC utilisation, stating that eligible ITC does not thereby become invalid, while the prescribed cash-payment requirement remains to be addressed through the applicable statutory or administrative mechanism. It cautions that DRC-03 should not automatically be treated as mandatory where the entire output tax liability has already been discharged. Subsequent-year cash payments do not retrospectively cure earlier-period non-compliance. Penalty is not specifically prescribed under Rule 86B, with Sections 125 and 126 discussed in relation to general penalty and safeguards.
Question – What does Rule 86B provide, and when does the 1% cash payment requirement apply?
Answer- Rule 86B of the CGST Rules, 2017 provides that where the value of taxable supplies made by a registered person in a tax period exceeds ₹50 lakh, subject to the prescribed conditions, the registered person is generally permitted to discharge not more than 99% of the output tax liability through utilisation of Input Tax Credit (ITC). Accordingly, at least 1% of the output tax liability is required to be discharged through the Electronic Cash Ledger.
In other words, where Rule 86B applies, the taxpayer is required to ensure that at least 1% of the output tax liability is paid in cash, while the remaining liability may be discharged through eligible ITC.
However, Rule 86B contains specific exceptions. Where a registered person falls within any of the prescribed exceptions, the restriction requiring the minimum 1% cash payment does not apply, and the taxpayer may utilise ITC beyond the 99% limit, subject to the applicable provisions.
Therefore, while determining the applicability of Rule 86B, it is necessary to consider not only whether the value of taxable supplies exceeds ₹50 lakh, but also whether the registered person falls within any of the exceptions prescribed under Rule 86B.
Question– Is the 1% cash payment requirement under Rule 86B calculated after including the tax payable under Reverse Charge Mechanism (RCM)?
Answer – No. The 1% minimum cash payment requirement under Rule 86B is calculated with reference to the output tax liability of the registered person. Tax payable under the Reverse Charge Mechanism (RCM) is not treated as output tax liability for this purpose.
Accordingly, the portion of tax liability relating to RCM supplies is excluded while determining the output tax liability against which the 99% ITC utilisation restriction under Rule 86B is applied.
Example- Suppose a registered person’s total tax liability for a tax period is ₹10,00,000, comprising:
- Output tax liability on outward supplies: ₹8,00,000
- Tax payable under RCM: ₹2,00,000
For the purpose of Rule 86B, the 1% cash payment requirement is calculated only on ₹8,00,000, being the output tax liability.
Therefore:
- Output tax liability = ₹8,00,000
- Minimum 1% cash payment = ₹8,000
- Maximum ITC utilisation towards output tax liability = ₹7,92,000
The ₹2,00,000 RCM liability is not included in determining the 1% threshold under Rule 86B. Further, RCM liability is required to be discharged in cash in accordance with the applicable provisions and cannot be paid by utilising ITC.
Thus, RCM liability does not increase the amount on which the 1% Rule 86B cash-payment requirement is calculated.
Question – If a registered person has taxable supplies exceeding ₹50 lakh in a particular month but his aggregate turnover is less than ₹6 crore during the financial year, will Rule 86B still apply?
Answer- Yes. The applicability of Rule 86B of the CGST Rules, 2017 is determined with reference to the taxable supplies made during the relevant month and is not dependent upon the taxpayer first crossing an annual turnover of ₹6 crore.
Therefore, the taxpayer is not required to cumulatively add the taxable supplies of earlier months for determining whether the ₹50 lakh threshold has been crossed. The taxable supplies of the relevant month have to be considered.
Accodingly, if the value of taxable supplies in a particular month exceeds ₹50 lakh, Rule 86B may become applicable for that tax period, subject to the specified exceptions, even if the taxpayer’s aggregate turnover for the entire financial year is ultimately less than ₹6 crore.
Question– If a registered person makes different types of supplies, such as taxable, exempt, non-taxable and zero-rated supplies, which supplies are considered for determining the ₹50 lakh threshold under Rule 86B?
Answer- For determining the ₹50 lakh threshold under Rule 86B of the CGST Rules, 2017, the value of supplies is not considered cumulatively across all categories.
The threshold is determined by considering the taxable supplies made during the relevant month.
Accordingly:
- Taxable supplies → Included
- Exempt supplies → Excluded
- Non-taxable supplies → Excluded
- Zero-rated supplies, including exports and supplies to SEZ → Excluded
Therefore, the ₹50 lakh threshold is tested with reference to the value of taxable supplies, subject to the applicable provisions and exceptions under Rule 86B.
Example- Suppose a registered person makes the following supplies during a particular month:
| Nature of Supply | Value |
| Taxable supplies | ₹40 lakh |
| Exports (zero-rated) | ₹20 lakh |
| Exempt supplies | ₹10 lakh |
| Total supplies | ₹70 lakh |
Although the taxpayer’s total supplies are ₹70 lakh, only the ₹40 lakh taxable supplies are considered for the ₹50 lakh threshold under Rule 86B.
Since taxable supplies are ₹40 lakh, which is below ₹50 lakh, Rule 86B would not be attracted on this ground for that month, subject to the other conditions of the Rule.
Key takeaway
For the ₹50 lakh threshold under Rule 86B:
Taxable supplies → Counted
Exempt / non-taxable supplies → Not counted
Exports / SEZ supplies (zero-rated) → Not counted
Thus, a taxpayer having total supplies exceeding ₹50 lakh does not automatically become subject to Rule 86B if the value of taxable supplies during the relevant month does not exceed ₹50 lakh.
Question– How is the 1% cash-payment criterion applied cumulatively during the financial year for the purpose of the exception under Rule 86B?
Answer– Rule 86B provides an exception where the registered person has discharged, in aggregate, more than 1% of the total output tax liability cumulatively up to the said month in the current financial year through the Electronic Cash Ledger, subject to the other conditions prescribed under the Rule.
Therefore, while examining this particular exception, the taxpayer has to consider the cumulative output tax liability and the cumulative amount discharged through the Electronic Cash Ledger from the beginning of the financial year up to the relevant month.
Example -Suppose the taxpayer has the following tax liability and cash/ITC payments from April to December:
| Month | Total GST Liability (₹ lakh) | Cash Payment (₹ lakh) | ITC Payment (₹ lakh) |
| April | 50 | 0 | 50 |
| May | 80 | 2 | 78 |
| June | 90 | 0.50 | 89.50 |
| July | 100 | 0 | 100 |
| August | 120 | 2 | 118 |
| September | 130 | 1.50 | 128.50 |
| October | 150 | 1 | 149 |
| November | 160 | 0 | 160 |
| December | 170 | 3 | 167 |
| Total | 1,050 | 10 | 1,040 |
Up to December:
Cumulative GST liability = ₹1,050 lakh
Cumulative cash payment = ₹10 lakh
Therefore:
Cash payment as a percentage of cumulative liability = ₹10 lakh ÷ ₹1,050 lakh × 100 = 0.95%
Since the cumulative cash payment is less than 1%, the taxpayer has not satisfied the 1% cumulative cash-payment criterion for this particular exception under Rule 86B as of December.
Accordingly, the taxpayer cannot rely upon this exception merely on the basis of the above cumulative figures.
What happens if the taxpayer crosses 1% subsequently?
Suppose in January the taxpayer pays an additional ₹2 lakh in cash against a GST liability of ₹100 lakh.
The cumulative figures up to January would then be:
- Cumulative GST liability: ₹1,150 lakh
- Cumulative cash payment: ₹12 lakh
Therefore:
₹12 lakh ÷ ₹1,150 lakh × 100 = 1.04%
The taxpayer has now crossed the 1% cumulative threshold.
Accordingly, subject to the other conditions prescribed under Rule 86B, the taxpayer may examine the availability of the relevant exception from the restriction under Rule 86B.
Key takeaway
For this particular exception, the calculation is made cumulatively from April of the current financial year up to the relevant month.
Cumulative cash payment ÷ Cumulative output tax liability × 100
If the resulting percentage is more than 1%, and the other conditions of the exception are satisfied, the taxpayer may rely upon the exception provided under Rule 86B.
Question: What is the procedure for a registered person to rectify an inadvertent non-compliance with Rule 86B of the CGST Rules, 2017, where the output tax liability was discharged using Input Tax Credit (ITC) in excess of 99%, thereby resulting in a failure to pay the mandatory minimum 1% through the Electronic Cash Ledger?
Answer: This question with answer has been given in Practical FAQs on filing of Form GSTR-3B by The Institute of Chartered Accountants of India.
Rule 86B of the CGST Rules, 2017 restricts utilisation of ITC beyond 99% of output tax liability where taxable turnover exceeds Rs. 50 lakhs in a month (subject to certain exceptions). In cases where a taxpayer has utilised ITC in excess of the permissible limit under Rule 86B, such excess utilisation does not render the ITC itself ineligible or invalid. However, it results in a shortfall in the mandatory cash payment portion (i.e., the minimum 1% of output tax liability), thereby leading to a procedural non-compliance.
To regularise the said non-compliance, the taxpayer is required to recompute the liability for the relevant tax periods and ensure that at least 1% of the output tax has been discharged in cash. Any shortfall in such cash payment must be paid by the taxpayer through Form DRC-03 on the GST portal.
Subsequent to making the differential payment, the taxpayer may seek appropriate relief by filing a refund application under Section 54(1) of the CGST Act, 2017 for the amount of tax earlier discharged through ITC to the extent of 1%. The taxpayer may also request the jurisdictional officer to re-credit such amount to the Electronic Credit Ledger through issuance of Form PMT-03, in accordance with the provisions of the Act and Rules.
Example- Suppose M/s ABC Traders, a registered person, has taxable supplies of ₹60 lakh during a month and its total output tax liability is ₹10 lakh.
Assume that Rule 86B applies and none of the prescribed exceptions is applicable.
Under Rule 86B, the taxpayer can utilise ITC for a maximum of 99% of the output tax liability:
- Total Output Tax Liability: ₹10,00,000
- Maximum ITC utilisation (99%): ₹9,90,000
- Minimum cash payment required (1%): ₹10,000
However, due to an inadvertent error, the taxpayer utilised ₹9,98,000 of ITC and paid only ₹2,000 through the Electronic Cash Ledger.
Thus:
- ITC actually utilised: ₹9,98,000
- Cash actually paid: ₹2,000
- Cash payment required under Rule 86B: ₹10,000
- Shortfall in cash payment: ₹8,000
The utilisation of the additional ₹8,000 of ITC does not, by itself, make the underlying ITC ineligible or invalid. The issue is that the taxpayer has not complied with the mandatory requirement of discharging at least 1% of the output tax liability through cash.
How can the error be regularised?
The taxpayer should first recompute the liability for the relevant tax period and determine the exact shortfall in cash payment.
In the above example, the taxpayer would need to pay the ₹8,000 shortfall through Form GST DRC-03 on the GST Portal.
After making the differential payment, the taxpayer may consider the appropriate statutory remedy for restoration/re-credit of the corresponding amount of ITC, subject to the applicable provisions and the acceptance of the jurisdictional tax authority. The ICAI FAQ referred to in the question discusses seeking appropriate relief, including refund/re-credit, in such circumstances.
In simple terms
Output Tax Liability: ₹10,00,000
ITC utilised: ₹9,98,000
Cash paid: ₹2,000
Minimum cash required: ₹10,000
Shortfall: ₹8,000
Therefore, the immediate issue is not cancellation of the entire ITC, but regularisation of the ₹8,000 shortfall in mandatory cash payment under Rule 86B.
Question–What happens after the shortfall in the mandatory 1% cash payment under Rule 86B is subsequently paid in cash?
Answer- Where a registered person has inadvertently utilised ITC in excess of the permissible 99% limit under Rule 86B and subsequently pays the shortfall in the mandatory cash component, the taxpayer may seek appropriate relief for the corresponding amount that was initially discharged through ITC and subsequently paid in cash.
For this purpose, the taxpayer may consider filing a refund application under Section 54(1) of the CGST Act, 2017, subject to the applicable statutory provisions and procedural requirements.
Alternatively, the taxpayer may approach the jurisdictional proper officer for appropriate relief and request re-credit of the corresponding amount to the Electronic Credit Ledger. Where permissible under the applicable provisions, such re-credit may be processed through FORM GST PMT-03.
Thus, payment of the cash shortfall is intended to regularise the Rule 86B non-compliance, while the taxpayer may separately seek appropriate relief in respect of the corresponding amount of ITC that was effectively replaced by the subsequent cash payment.
In the aforesaid example, there was a cash payment shortfall of ₹8,000.
The taxpayer subsequently pays the ₹8,000 shortfall in cash, for example, through FORM GST DRC-03, thereby regularising the short payment arising from non-compliance with Rule 86B.
After making this payment, the taxpayer has effectively discharged:
- ₹9,98,000 through ITC, and
- ₹10,000 through cash,
against the total output tax liability of ₹10,00,000.
Since ₹8,000 of the liability, which had initially been discharged through ITC, has subsequently been paid in cash, the taxpayer may seek appropriate relief in respect of the corresponding ₹8,000 of ITC.
For this purpose, the taxpayer may consider filing a refund application under Section 54(1) of the CGST Act, 2017, subject to the applicable provisions and procedural requirements. Alternatively, the taxpayer may approach the jurisdictional proper officer seeking re-credit of ₹8,000 to the Electronic Credit Ledger, where permissible, including through FORM GST PMT-03.
In simple terms:
ITC utilised: ₹9,98,000
Cash initially paid: ₹2,000
Additional cash paid to comply with Rule 86B: ₹8,000
Total cash paid: ₹10,000
Corresponding ITC amount for which relief may be sought: ₹8,000
Thus, the subsequent payment of ₹8,000 in cash regularises the Rule 86B shortfall, while the taxpayer may separately seek appropriate refund/re-credit relief for the corresponding amount of ITC, subject to the applicable legal provisions.
Question– Is payment through FORM GST DRC-03 appropriate where the entire output tax liability has already been discharged, but the taxpayer has inadvertently violated the 1% cash-payment requirement under Rule 86B?
Answer – Not necessarily. Care should be taken before treating the shortfall in the mandatory cash component under Rule 86B of the CGST Rules, 2017 as an additional tax liability payable through FORM GST DRC-03.
For example, suppose the output tax liability of a registered person is ₹10,00,000. Where Rule 86B applies, the taxpayer is generally required to discharge at least 1% (₹10,000) of the liability through the Electronic Cash Ledger and can utilise ITC for the balance, subject to the provisions and exceptions of Rule 86B.
If, due to an inadvertent error, the taxpayer utilises ₹9,98,000 through ITC and pays ₹2,000 in cash, the entire output tax liability of ₹10,00,000 has nevertheless been discharged:
- ITC utilised: ₹9,98,000
- Cash paid: ₹2,000
- Total tax discharged: ₹10,00,000
The ₹8,000 difference represents the shortfall in the prescribed minimum cash component under Rule 86B. It does not automatically represent an additional output tax liability of ₹8,000.
Accordingly, merely making a payment of ₹8,000 through DRC-03 as tax may result in the taxpayer effectively paying the same output tax liability again to that extent. Therefore, DRC-03 should not be stated as an automatic or mandatory mechanism for rectifying every such Rule 86B non-compliance.
The taxpayer should instead examine the applicable provisions, the nature of the non-compliance and the procedure prescribed or accepted by the jurisdictional proper officer for regularisation. The taxpayer may also seek appropriate relief regarding the corresponding amount of ITC that was utilised in excess of the permissible limit.
in brief
Output tax liability: ₹10,00,000
Permissible ITC utilisation: ₹9,90,000
Minimum cash payment: ₹10,000
Actually utilised through ITC: ₹9,98,000
Actually paid in cash: ₹2,000
Rule 86B cash shortfall: ₹8,000
However, since ₹10,00,000 has already been discharged, the ₹8,000 should not automatically be characterised as an unpaid tax liability.
Therefore, the safer position is that the Rule 86B non-compliance should be regularised through the appropriate statutory/administrative mechanism, rather than mechanically treating the ₹8,000 as additional tax payable through DRC-03.
Question– If a taxpayer did not discharge the mandatory 1% of output tax liability in cash during FY 2024-25 but discharged 10% of the output tax liability in cash during FY 2025-26, can the subsequent cash payment be treated as compliance with Rule 86B for FY 2024-25?
Answer – No. Compliance with Rule 86B of the CGST Rules, 2017 has to be examined with reference to the relevant tax period for which the restriction applies. A higher cash payment made in a subsequent financial year does not, by itself, retrospectively satisfy the minimum 1% cash-payment requirement applicable to an earlier tax period.
Example- Suppose during FY 2024-25:
- Output tax liability = ₹10,00,000
- Minimum cash payment required under Rule 86B = ₹10,000 (1%)
- ITC utilised = ₹10,00,000
- Cash payment = Nil
The taxpayer has therefore not complied with the prescribed mode of discharge under Rule 86B for that relevant tax period.
Now suppose during FY 2025-26, the taxpayer has another output tax liability of ₹10,00,000 and pays ₹1,00,000 (10%) in cash.
The ₹1,00,000 cash payment made during FY 2025-26 cannot automatically be adjusted or treated as the ₹10,000 cash payment required for FY 2024-25.
However, this does not necessarily mean that an additional tax liability of ₹10,000 arose for FY 2024-25. If the entire FY 2024-25 output tax liability had already been discharged through eligible ITC, the issue is primarily one of non-compliance with the prescribed manner of discharge under Rule 86B.
Accordingly, the taxpayer should separately examine the appropriate mechanism for regularising the FY 2024-25 non-compliance, rather than treating the subsequent year’s higher cash payment as automatic compliance.
In short
FY 2024-25: 1% cash required → Nil cash paid → Rule 86B non-compliance.
FY 2025-26: 10% cash paid → Does not retrospectively cure the FY 2024-25 non-compliance merely because more than 1% was paid in the subsequent year.
The compliance requirement under Rule 86B should therefore be evaluated tax-period-wise, subject to the specific facts, applicable exceptions and the statutory mechanism available for regularisation.
Question– Is any penalty leviable for inadvertent non-compliance with Rule 86B of the CGST Rules, 2017?
Asnwer – Rule 86B does not itself prescribe a specific penalty for failure to comply with the requirement of discharging at least 1% of the output tax liability through the Electronic Cash Ledger.
Therefore, where the taxpayer has inadvertently utilised ITC in excess of the permissible 99% limit, the possibility of penalty has to be examined with reference to the general penalty provisions under the CGST Act, particularly Sections 125 and 126.
Section 125 provides for a general penalty which may extend to ₹25,000 where a person contravenes any provision of the CGST Act or the Rules for which no separate penalty is provided.
However, Section 126 provides important safeguards. No penalty should be imposed for a minor breach of tax regulations or a procedural requirement, particularly where the omission or mistake is easily rectifiable and has occurred without fraudulent intent or gross negligence. The penalty, if imposed, must also be commensurate with the degree and severity of the breach. Further, the taxpayer must be given an opportunity of being heard.
Conclusion-
In simple terms— utilisation of ITC in excess of 99% under Rule 86B does not, by itself, make the otherwise eligible ITC ineligible or invalid. The key issue is whether the taxpayer has complied with the prescribed minimum 1% cash-payment requirement for the relevant tax period.
Where there is a shortfall in the 1% cash-payment requirement, the taxpayer should identify the non-compliance for the relevant tax period and regularise the position in accordance with the applicable provisions. Merely making a higher cash payment in a subsequent tax period or subsequent financial year does not, by itself, establish compliance with Rule 86B for the earlier period.
Similarly, where the entire output tax liability has already been discharged, the Rule 86B cash-payment shortfall should not automatically be treated as an additional tax liability requiring a fresh payment of tax through DRC-03. In such circumstances, the taxpayer should examine the appropriate statutory mechanism for relief in respect of the corresponding ITC, including refund or re-credit, subject to the applicable provisions and the prescribed procedure and approval of the competent authority.
Thus, in dealing with Rule 86B, three aspects should be considered separately:
ITC Eligibility → Eligible ITC does not become invalid merely because of excess utilisation under Rule 86B.
1% Cash-Payment Compliance → Compliance must be examined with reference to the relevant tax period, subject to the exceptions provided under the Rule.
Subsequent Relief/Regularisation → Any corrective or restorative relief should be pursued through the applicable statutory provisions and prescribed procedure.
*****
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
