Rule 86B of CGST Rules, 2017 – Restriction on ITC Utilization

[Tushar Malik]

Introduction

The Government introduced Rule 86B in the CGST Rules via Notification No. 94/2020 – Central Tax dated 22nd December 2020, which became effective from 1st January 2021. This rule is an anti-evasion measure aimed at restricting the complete discharge of GST liability through the Input Tax Credit (ITC) mechanism, thereby ensuring some cash payment from large taxpayers.

Where the value of taxable supply (excluding exempt and zero-rated supplies) of a registered person exceeds ₹50 lakh in a month, ITC cannot be used to discharge more than 99% of output tax liability. This means, at least 1% of the GST payable must be paid in cash.

In Simple Terms:

✔ If monthly taxable turnover > ₹50 lakh (excluding exempt and zero-rated supplies),
✔ Minimum 1% of GST liability must be paid in cash,
✔ The remaining 99% may be paid through ITC.

Applicability

• Applicable to registered persons under GST whose monthly taxable supply exceeds ₹50 lakh.
• The ₹50 lakh threshold excludes:
  • Exempt supplies
  • Zero-rated supplies (exports & supplies to SEZs without payment of tax)

Exceptions (When Rule 86B Does Not Apply)

Rule 86B will NOT apply under the following circumstances:

1. Income Tax Payment Criteria:

• If the registered person (or Proprietor/ Karta/ Managing Director/ Partner/ Whole-time Director) has paid Income Tax exceeding ₹1 lakh in each of the last two financial years.

2. Refund Criteria:

• If the taxpayer has received a refund of more than ₹1 lakh in the previous financial year on account of:
  • Unutilized ITC from zero-rated supplies without payment of tax (exports or SEZ supplies under LUT), or
  • Inverted duty structure (rate of tax on inputs higher than outputs).

3. Cash Payment Criteria:

• If the taxpayer has already cumulatively paid >1% of output tax liability in cash up to the said month in the current financial year.

4. Exempted Entities:

• The restriction will not apply to:
  • Government Departments
  • Public Sector Undertakings (PSUs)
  • Local Authorities
  • Statutory Bodies

5. Commissioner Discretion:

• The Commissioner may, upon application, remove the restriction after due verification and with recorded reasons.

Objective of Rule 86B

• To prevent misuse of ITC through fake invoicing.
• To ensure minimum cash flow from large taxpayers.
• To curb circular trading and tax evasion.
• To strengthen GST compliance and government revenue collection.

Example

Let’s say ABC Pvt. Ltd. has a monthly taxable turnover of ₹80 lakh in February.

• GST @ 18% = ₹14.4 lakh output liability.
• Maximum ITC utilization allowed = ₹14.26 lakh (99%).
• Minimum ₹14,400 (1%) must be paid in cash via Electronic Cash Ledger.

Impact on Businesses

1. For Large Taxpayers:

• Need to maintain liquidity for minimum cash payments.
• Tightens compliance to discourage non-genuine businesses.

2. For Small & Medium Enterprises (SMEs):

• Rule 86B does NOT affect businesses with taxable turnover ≤ ₹50 lakh in a month.
• No impact on micro and small enterprises operating below the threshold.

CBIC Clarification

The CBIC has clarified that:

• The 1% cash requirement is monthly, based on monthly turnover.
• It applies only to the output tax liability after excluding exempt and zero-rated turnover.

Penalties for Non-Compliance

• Interest & penalties on excess ITC used.
• Suspension or cancellation of GST registration.
• Prosecution under relevant sections of the CGST Act.

Rule 86B is a targeted move by the Government to tighten GST compliance, ensure genuine cash flow, and fight tax evasion. Although it adds a compliance burden on large businesses, it strengthens the GST system's integrity.

Always review turnover and ITC usage before filing GSTR-3B, and plan cash flows accordingly to stay compliant with Rule 86B.