Rule 86B of GST Rules (India) is a specific provision under the Goods and Services Tax (GST) regime that was introduced to curb tax evasion and improve compliance.
Rule 86B places a restriction on the use of Input Tax Credit (ITC) for discharging output tax liability.
Rule 86B of the GST Rules (Central Goods and Services Tax Rules, 2017) was introduced to curb tax evasion and ensure better compliance by restricting the use of input tax credit (ITC) for discharging output tax liability under certain conditions.
Text of Rule 86B (Simplified):
Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge their output tax liability in excess of 99% of such tax liability, in cases where the value of taxable supply (excluding exempt and zero-rated supply) in a month exceeds Rs. 50 lakh.
This means: If your monthly taxable turnover is more than Rs.50 lakh, you can use ITC to pay only up to 99% of your GST liability. The remaining 1% must be paid in cash.
Applicability: If a registered person’s monthly taxable turnover exceeds Rs.50 lakhs (excluding exempt and zero-rated supplies), then they cannot use ITC beyond 99% of their output tax liability.
That means, at least 1% of the output tax liability must be paid in cash.
Exceptions to Rule 86B:
The restriction does not apply if any of the following conditions are met:
- Income tax paid > Rs.1 lakh in each of the last two financial years (by proprietor, partner, MD, or Karta).
- The registered person has received a refund of Rs. 1 lakh or more on account of unutilized ITC due to zero-rated supply or inverted duty structure in the past financial year.
- The registered person has discharged more than 1% of the tax liability in cash cumulatively up to the current month in the financial year.
- The registered person is a Government department, PSU, local authority, or statutory body.
Purpose of Rule 86B:
- To prevent fake invoicing and circular trading.
- To increase accountability in high-turnover businesses.
- To ensure real tax payment in cases of suspected misuse of ITC.
- To prevent fraudulent use of ITC by entities who inflate their input credit to pay almost zero tax in cash.
- To improve cash flow into the government exchequer.
- Targeted at high turnover businesses to ensure at least a minimum tax is paid in cash.
Effective Date:
Rule 86B came into effect from January 1, 2021
Example:
If a company has:
- Monthly taxable turnover: Rs.70 lakhs
- Output GST liability: Rs.12 lakhs
- Available ITC: Rs.15 lakhs
Under Rule 86B:
- The company can use ITC only up to 99% of Rs.12 lakhs = Rs.11.88 lakhs.
- It must pay the remaining Rs.12,000 (1%) in cash.
Example-2:
If a business has:
- Taxable outward supplies of Rs.60 lakh in a month.
- Total GST liability = Rs.10.8 lakh (18% GST)
- ITC available = Rs.15 lakh
Under Rule 86B:
- Only 99% of Rs.10.8 lakh = Rs10.692 lakh can be paid via ITC.
- At least Rs.10.8 lakh – Rs.10.692 lakh = Rs.10,800 must be paid in cash.
If anyone have not follow Rule 86B and received notice from GST department to cancel his/her GST registration suo-moto, then there is a landmark judgment which can be helpful for you;
IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA
CWP No.1517 of 2024 Reserved on:06.09.2024 Pronounced on:20.09.2024
M/s A.M. Enterprises …Petitioner
Versus
State of Himachal Pradesh & Ors. …Respondents