Top Stories GST Rule 86B Explained: Utilise 99% ITC for Output Tax Liability Discharge, at least 1% Must Be Paid in Cash The applicability of this rule is mandatory for any registered person whose taxable supply exceeds INR 50 lakhs in a month, requiring taxpayers to check their turnover monthly before filing their returns. By Navasree A.M – On October 21, 2024 5:15 pm – 3 mins read

The Goods and Services Tax ( GST ) Rule 86B, introduced by the Central Board of Indirect Taxes and Customs ( CBIC ) through notification number 94/2020 on December 22, 2020, became effective from January 1, 2021. Under Rule 86B, businesses with a taxable supply value exceeding INR 50 lakhs in a month cannot use more than 99% of their output tax liability to be discharged through ITC. In simple terms, this means they must pay at least 1% of their total tax liability in cash. This rule imposes restrictions on how registered taxpayers can utilise their Electronic Credit Ledger (ECRL) balances to pay their tax liabilities. Specifically, it targets taxpayers whose turnover exceeds INR 50 lakhs in a month, excluding zero-rated and exempt supplies. The primary aim of Rule 86B is to prevent fraudulent practices, particularly the misuse of input tax credit (ITC) through fake invoices, which can undermine the integrity of the GST system. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here Before the introduction of Rule 86B, taxpayers could fully utilise their ITC available in the ECRL to pay their output tax liabilities without any restrictions.

The applicability of this rule is mandatory for any registered person whose taxable supply exceeds INR 50 lakhs in a month, requiring taxpayers to check their turnover monthly before filing their returns. EXCEPTIONS There are several exceptions to Rule 86B. The restriction on using input tax credit ( ITC ) does not apply if the taxpayer, or key individuals like the proprietor, Karta, managing director, or partners, have paid over INR 1 lakh in income tax in each of the last two financial years. Additionally, the rule is exempted if the taxpayer has received a refund exceeding INR 1 lakh for unutilized ITC from exports under LUT or due to the inverted duty structure in the previous year.

If the taxpayer has paid more than 1% of their total output tax liability in cash, or if the registered entity is a government department, public sector undertaking, local authority, or statutory body, they are also exempt from this restriction. Furthermore, the Commissioner may lift the restriction based on necessary verifications. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here RULE 86B “RuIe 86B. Restrictions on use of amount available in electronic credit ledger.- 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 ninety- nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt.

Provided that the said restriction shall not apply where – the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability`; or the registered person is –

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here (i) Government Department; or (ii) a Public Sector Undertaking; or (iii) a local authority; or (iv) a statutory body: Provided further that the Commissioner or an officer authorized by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.” Rule 86B mainly targets large taxpayers, leaving micro and small businesses unaffected.he rule seeks to limit the misuse of input tax credit by larger entities, while protecting genuine, smaller businesses from unnecessary restriction.