GST Rule 86B: Restriction on ITC Utilisation – Practical Insights & Legal Position

Introduction

The Goods and Services Tax (GST) regime allows smooth and uninterrupted flow of Input Tax Credit (ITC). However, to curb fake invoicing and prevent misuse of ITC, the Government introduced Rule 86B vide Notification No. 94/2020 – Central Tax dated 22.12.2020, as part of the CGST (Fourteenth Amendment) Rules, 2020, effective from 01.01.2021.

This provision was introduced as an anti-evasion measure to ensure minimum cash flow to the Government.

What is Rule 86B?

Rule 86B provides that:

Where the value of taxable supply (excluding exempt, nil-rated and zero-rated supplies) exceeds ₹50 lakh in a month, the registered person shall not utilize Input Tax Credit (ITC) in excess of 99% of the output tax liability, and shall pay at least 1% of such liability in cash.

In simple terms:

At least 1% of GST liability must be paid in cash.

Working Mechanism

• Output Tax Liability = ₹1,00,000
• ITC Available = ₹1,00,000

As per Rule 86B:

• ITC Utilization = ₹99,000
• Cash Payment = ₹1,000

Applicability

Rule 86B applies when:

✔ Taxable turnover (excluding exempt, nil-rated & zero-rated supplies)
✔ Exceeds ₹50 lakh in a month

 X Exceptions (Where Rule 86B shall not apply)

Rule 86B shall not apply in the following cases:

1. Where the registered person has paid Income Tax exceeding ₹1 lakh in each of the last two financial years.
2. Where the registered person has received refund exceeding ₹1 lakh in the preceding financial year on account of unutilized ITC.
3. Where the registered person has discharged output tax liability in cash exceeding 1% cumulatively up to the said month in the current financial year.
4. In case of Government departments, Public Sector Undertakings (PSUs), local authorities, and statutory bodies.

Practical Case Study – PWD Contractor

In one of my professional assignments, a similar issue arose:

Mr. XYZ, a PWD contractor:

• Turnover (June 2025): ₹65,00,000
• GST Rate: 18%
• Output Tax: ₹11,70,000

Since turnover exceeded ₹50 lakh, Rule 86B appeared applicable.

Normal calculation:

• ITC allowed: ₹11,58,300
• Cash liability: ₹11,700

Dispute Raised by Department

The department insisted that:

“1% of output tax must be paid in cash as per Rule 86B.”

Legal Position & Resolution

However, upon verification:

• Mr. XYZ had paid Income Tax exceeding ₹1 lakh in:
  • FY 2023–24
  • FY 2024–25

Therefore, he satisfied the exception condition.

✔ Rule 86B not applicable
✔ Full ITC utilization allowed
✔ No mandatory cash payment

Professional Insights

In my professional experience handling GST matters, it is observed that:

• Field officers sometimes apply Rule 86B mechanically
• Exceptions are often overlooked
• Taxpayers unnecessarily pay cash due to lack of awareness

Proper legal understanding can save working capital of clients.

Key Challenges

• Misinterpretation by department
• Working capital pressure
• Lack of awareness of exceptions

Conclusion

Rule 86B is a significant anti-evasion provision under GST; however, its application must always be read along with the prescribed exceptions.

Final Takeaway:

“Rule 86B restricts ITC, but knowledge of its exceptions protects the taxpayer.”

(Author: Satwik Hubballi – Tax Consultant, Karnataka)
The views expressed are based on practical experience and interpretation of GST law.

Frequently Asked Questions (FAQs)

Q1. What is GST Rule 86B?

Ans. Rule 86B restricts the utilisation of Input Tax Credit (ITC) for certain registered persons. Where the value of taxable supplies (excluding exempt, nil-rated, and zero-rated supplies) exceeds ₹50 lakh in a month, a taxpayer cannot use ITC to discharge more than 99% of the output GST liability and must pay at least 1% of the liability in cash, unless an exception applies.

Q2. When does Rule 86B become applicable?

Ans. Rule 86B applies when the value of taxable supplies, excluding exempt, nil-rated, and zero-rated supplies, exceeds ₹50 lakh in a particular month. The restriction relates to the utilisation of ITC for payment of output tax liability.

Q3. Who is exempt from the restrictions under Rule 86B?

Ans. Rule 86B does not apply where the registered person has paid income tax exceeding ₹1 lakh in each of the last two financial years, has received a refund exceeding ₹1 lakh in the preceding financial year on account of unutilised ITC, has discharged more than 1% of output tax liability in cash cumulatively during the current financial year, or is a Government department, PSU, local authority, or statutory body.

Q4. Can a taxpayer utilise 100% of available ITC even if monthly turnover exceeds ₹50 lakh?

Ans. Yes. If the taxpayer satisfies any of the prescribed exceptions under Rule 86B, the restriction does not apply. In such cases, the taxpayer may utilise eligible ITC in accordance with the GST provisions without the mandatory 1% cash payment requirement.

Q5. What common mistake should taxpayers avoid regarding Rule 86B?

Ans. A common mistake is assuming that Rule 86B automatically applies whenever monthly taxable turnover exceeds ₹50 lakh. Before making any mandatory cash payment, taxpayers should carefully verify whether they qualify for any of the exceptions, as overlooking them may result in unnecessary blockage of working capital.