Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017 was introduced via Notification No. 94/2020 – Central Tax dated 22nd December 2020, and became effective from 1st January 2021.
This rule restricts the use of Input Tax Credit (ITC) for discharging output tax liability in certain high-turnover cases to prevent misuse of ITC and fraudulent claims.
✅ Applicability of Rule 86B
Rule Statement:
“Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of 99 percent of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds ₹50 lakhs.”
✔️ When does it apply?
Rule 86B becomes applicable if all the following conditions are met:
1. The registered person is making taxable outward supplies (excluding exempt and zero-rated supplies);
2. The value of such taxable supplies exceeds ₹50 lakhs in a calendar month;
3. Then the taxpayer can utilize ITC only up to 99% of the total output GST liability;
4. The remaining 1% of the GST liability must be discharged in cash using the electronic cash ledger.
❌ Exceptions to Rule 86B
Rule 86B does not apply in the following cases (as per Proviso to Rule 86B):
1. High Income Tax Payment:
If the registered person or the proprietor/Karta/managing director/partner/trustee, as the case may be, has paid more than ₹1 lakh as Income Tax under the Income Tax Act, 1961, in each of the last two financial years.
2. Government Entities:
3. Refunds Received:
➡️ If the registered person has received a refund exceeding ₹1 lakh in the preceding financial year:
➡️Either on account of zero-rated supplies without payment of tax, or
➡️On account of inverted duty structure (i.e., where ITC accumulation is due to the rate of input being higher than the rate of output).
4. Discharging Liability through Cash > 1% in Past:
If the registered person (or their company) has already discharged output liability in cash exceeding 1% of total output tax liability cumulatively up to the said month in the current financial year, then Rule 86B shall not apply.
🔒 Legal Authority for Rule 86B
1. Statutory Backing: Rule 86B is framed under the powers conferred by Section 49(4) of the CGST Act, 2017, which deals with utilization of ITC from the electronic credit ledger.
2. The rule was enforced through Notification No. 94/2020-Central Tax.
Non-Compliance Outcomes
