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:
- Where the registered person has paid Income Tax exceeding ₹1 lakh in each of the last two financial years.
- Where the registered person has received refund exceeding ₹1 lakh in the preceding financial year on account of unutilized ITC.
- Where the registered person has discharged output tax liability in cash exceeding 1% cumulatively up to the said month in the current financial year.
- 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.
Author Bio
corrugated box manufacturer have to bear 1% more gst.
its very wrong for corrugated box manufacturer