Observations Every Business Should Review Before Filing GSTR-9 and GSTR-9C - Rule 86B: The One Percent Cash Payment Check That Systems Miss

Rule 86B: The One Percent Cash Payment Check That Systems Miss

“A full credit ledger does not always give the legal right to use every rupee of it.”

A healthy electronic credit ledger does not always mean the entire GST liability can be paid through ITC.

The audit issue

Rule 86B restricts use of the electronic credit ledger beyond 99 percent of output tax liability where taxable supplies, other than exempt and zero-rated supplies, exceed the prescribed monthly threshold, unless an exception applies. Businesses can breach the rule when return software automatically offsets the maximum available credit without testing the threshold and exceptions each month.

Legal framework

Rule 86B of the CGST Rules contains the restriction and exceptions. Section 49 governs payment and utilisation of tax, interest, penalty and other amounts. The rule must be applied carefully to the taxable-supply value and output tax liability of the relevant month.

What the officer will examine

The officer compares monthly taxable turnover, tax liability, cash ledger debits and credit utilisation. If less than one percent was paid in cash, the taxpayer is asked to prove an exception,such as specified income-tax payment history, refund conditions, qualifying status of key persons, or cumulative cash discharge,using contemporaneous records. Entity assumptions are risky because the rule works registration-wise and month-wise.

What to correct before GSTR-9 and GSTR-9C

Before annual filing, prepare a monthly Rule 86B applicability sheet. Exclude exempt and zero-rated supplies correctly, compute the threshold, capture the exact exception relied upon and retain supporting evidence. Reconcile cash payments with GSTR-3B and the electronic liability register. Do not assume that payment of interest, RCM or other cash amounts necessarily satisfies the particular output-tax test without checking the language applicable to the period.

Closing takeaway

Rule 86B is a monthly control that GSTR-9 cannot repair by presentation. The annual review should therefore confirm that every high-turnover month was tested. A short exception file prepared now can save a long audit dispute later.

Practical audit scenario

Imagine taxable monthly supplies cross the Rule 86B threshold in only three months. An annual average will conceal those months, and a full-year cash payment total will not necessarily prove monthly compliance. For each relevant month, retain the calculation and the evidence for any exception relied upon. If the exception depends on persons connected with the registration or historical payments, preserve the supporting records as they stood then. An audit objection becomes difficult to answer when the business first searches for exception evidence years after return filing.

The safest approach is to identify and document the issue before the annual return is filed. Once an audit communication is issued, correction options may narrow and every explanation must be supported by records. The review should therefore record the factual position, legal conclusion, amount involved, return impact, corrective action, owner and supporting documents. Material positions should be approved, while immaterial differences should still be catalogued so repeated small errors do not become a pattern across tax periods. This converts a year-end reconciliation into a defensible audit file.

Before finalising your annual return, consider an independent GST reconciliation and health check focused on the records an audit officer is most likely to test.

Essential Checks Before You File GSTR-9 & 9C : Part 7

This is Part 7 of our 15-part series uncovering critical GST checks every business should complete before filing GSTR-9 and GSTR-9C or facing a departmental audit. Stay tuned for the next post.

Disclaimer : This article is for informational purposes only and should not be construed as legal or professional advice. Taxpayers should consult their tax advisor based on the facts of their specific case before taking any action.