Rule 86B, since its introduction, has faced strong criticism for restricting the use of input tax credit (ITC) from the electronic credit ledger to discharge output tax. This article addresses its provisions and practical impact through answers to frequently asked questions.
What does Rule 86B require?
It mandates that eligible taxpayers must pay at least 1% of their monthly output tax liability in cash, even if sufficient ITC is available.
Persons required to comply with Rule 86B
Registered persons whose monthly taxable turnover exceeds ₹50 lakhs (excluding exempt and zero-rated supplies) are required to pay at least 1% of their GST liability in cash, subject to certain exceptions.
Exemptions: The following categories are exempt from Rule 86B:
Income Tax Payment Criterion: If the registered person, or specified individuals associated with the entity (such as proprietors, partners, or directors), have paid more than ₹1 lakh as income tax under the Income-tax Act, 1961, in each of the last two financial years.
Refund Recipients: Those who have received a refund exceeding ₹1 lakh in the preceding financial year for unutilized input tax credit on zero-rated supplies or inverted duty structures.
Cumulative Cash Payment: Taxpayers who have cumulatively discharged their output tax liability in cash exceeding 1% of the total liability up to the current month in the financial year.
Government Entities: Government departments, public sector undertakings, local authorities, and statutory bodies.
Rule 86B is applicable to both Association of Persons (AOP) and Private Limited Companies (Pvt Ltd) if their monthly taxable turnover exceeds ₹50 lakhs, unless they meet any of the exemptions outlined in the rule.
For both entities, if the threshold of ₹50 lakhs in taxable supplies is crossed in a month, they will be required to pay at least 1% of their output tax liability in cash, even if they have sufficient ITC available.
Question: A business makes:
₹60 lakhs in taxable domestic supplies
₹30 lakhs in zero-rated supplies (e.g. exports)
The doubt is: Should the 1% cash payment under Rule 86B apply to both?
Answer: Threshold Check (₹50 lakh limit):
Only taxable domestic supplies are considered.
In this case, ₹60 lakhs > ₹50 lakhs → Rule 86B applies.
1% Cash Payment Calculation:
Once Rule 86B applies, the 1% cash is calculated on total GST liability, including:
Tax on taxable supplies (₹60 lakhs)
Tax on zero-rated supplies with payment of tax (₹30 lakhs or more)
Given:
Taxable supplies: ₹60 lakhs
Zero-rated supplies (with tax): ₹40 lakhs
Total value = ₹100 lakhs
GST @18% = ₹18 lakhs
1% of ₹18 lakhs = ₹18,000 must be paid in cash, rest can be paid via ITC.
Note:
Zero-rated supplies are ignored for eligibility, but included in tax calculation if made with payment of tax.
Key Points:
Reverse Charge Mechanism (RCM): Payments made under RCM are not considered part of the output tax liability for the 1% cash payment calculation
Turnover Calculation: The ₹50 lakh threshold is determined monthly and does not require cumulative calculation of previous months' turnovers.
Zero-Rated Supplies: While zero-rated supplies are excluded when calculating the ₹50 lakh threshold, the 1% cash payment applies to the total output tax liability, including that on zero-rated supplies made with payment of tax
Implications of Non-Compliance:
Non-submission of GSTR-1: Failure to pay 1% cash of output tax liability prevents filing GSTR-1 for the next period.
Cancellation of Registration: Non-compliance may lead to GST registration cancellation.
Scrutiny of Returns: Non-payment may trigger return scrutiny, audits, and possible searches by authorities.
Demand Proceedings (Sections 73/74): Incorrect ITC usage may lead to tax demand, interest, and penalties, though Section 125 allows a maximum penalty of ₹25,000 for rule violations.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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Asif Hussain
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