A Small 1% Rule That Can Impact Your Entire GST Compliance (Rule 86B, CGST Rules)

Before you file your March GSTR 3B, pause and check this carefully. If throughout the financial year you have not discharged even 1% of your output tax liability in cash, at least check it in year end.

Let’s say your total turnover in the financial year is Rs10 crore and GST @18% results in Rs1.8 crore as output tax liability. If you have not paid any amount in cash during the year, then at the very least, ensure you discharge this in March.

Minimum 1% of output tax i.e. Rs 1,80,000 should be paid in cash. Even if sufficient ITC is available, full utilisation is not permitted unless you qualify under exceptions.

This rule is meant to be complied with on a monthly basis, but if it has been missed during the year, do not carry that mistake into March. At least paying in March helps you limit the impact to interest implications, rather than facing larger compliance issues.

Let’s understand it in more detail:

What is Rule 86B? (The Core Concept)

Rule 86B of the CGST Rules is an important compliance provision introduced to restrict excessive utilisation of Input Tax Credit (ITC). Under GST, taxpayers are generally allowed to discharge their output tax liability using ITC available in their electronic credit ledger.  A registered person is not allowed to use ITC to discharge more than 99% of the output tax liability in a month where-

• The value of taxable supply (excluding exempt and zero-rated supplies) exceeds Rs 50 lakhs.

• This effectively means that at least 1% of the output tax liability must be paid in cash through the electronic cash ledger.

The intention behind this rule is not to burden genuine taxpayers but to ensure that some portion of tax is paid in cash, thereby discouraging fraudulent ITC practices and ensuring a minimum cash flow to the Government.

Who Gets Relief? (Key Exceptions)

The restriction under Rule 86B shall not apply where -

1. The taxpayer or key persons such as proprietor, partner, director, or managing members have paid more than Rs 1 lakh as income tax in each of the last two financial years.

2. The registered person has received a refund exceeding Rs 1 lakh in the preceding financial year on account of zero-rated supplies or due to inverted duty structure.

3. The taxpayer has already discharged more than 1% of the output tax liability in cash cumulatively during the current financial year.

4. Government departments, public sector undertakings, local authorities, and statutory bodies are outside the scope of this rule.

5. The Commissioner or an authorised officer also has the power to remove the restriction after necessary verification and safeguards. Moreover, in respect of certain specified goods covered under Rule 31D, non-manufacturers are exempt from the applicability of this rule.

Practical Case :

In a particular month, your taxable turnover exceeds Rs.50 lakhs and your output tax liability comes to Rs.9,00,000. You also have sufficient ITC balance of Rs.9,00,000.

As per Rule 86B, you cannot use the entire ITC to pay GST. You are required to pay a maximum of 99% via ITC i.e. Rs,8,91,000) and a minimum of 1% in cash (Rs.9,000).

Missed 1% Cash Payment? Read This

This is a common issue faced by taxpayers. If you are unable to pay 1% in cash, you cannot ignore Rule 86B. Instead, you should check whether you qualify for exceptions provided in the rule.

Rule 86B is a safeguard to ensure minimum cash payment and prevent misuse of ITC, while still protecting genuine taxpayers through various exceptions.

With proper tracking during the year, this rule can be managed easily without last-minute pressure.

Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.