All about Rule 86B under GST– Restriction on ITC Utilisation

When Does Rule 86B Apply?

It applies only if all the following are true:

• Monthly taxable turnover (excluding exempt/zero‑rated) exceeds INR 50 lakh
• Output tax liability is being paid mainly through input tax credit.
• No applicable exemption is available

Rule 86B under Central Goods and Services Tax (CGST) Rules, 2017, applies to registered persons whose taxable supplies (excluding exempt and zero‑rated supplies) exceed INR 50 lakh in a month : If applicable, the taxpayer cannot use more than 99% of their Input Tax Credit to discharge output tax. A minimum of 1% of the output tax liability must be paid in cash through the Electronic Cash Ledger.

Who Is Exempt from Rule 86B?

Rule 86B under Central Goods and Services Tax (CGST) Rules, 2017, does not apply if ANY of these criteria are met:

• Income Tax Paid (> INR 1 lakh) : In any of the last two FYs by Proprietor, Partner, Director, Karta, (and other related persons)
• Refund-based exemption : Refund > INR 1 lakh in previous FY on account of Exports (with/without payment of tax), Inverted duty structure
• Government Entities : Departments, PSUs, Local authorities, Statutory bodies
• Cash payment already ≥ 1% : If 1% tax has already been paid in cash cumulatively in the current month → Rule satisfied.

How Compliance Is Monitored by GST Dept.

Practical Points related to Rule 86B under Goods and Services Tax

Applied monthly, not yearly; zero‑rated supplies are excluded from the INR 50 lakh threshold; Input Tax Credit auto‑blocking may occur in non‑compliance cases, and It is procedural, not penal, but non‑compliance triggers notices. We can understand Rule 86B under Central Goods and Services Tax (CGST) Rules, 2017 via a simple example.

• Output GST: INR 10,00,000
• Maximum ITC allowed: INR 9,90,000
• Minimum cash payment (1%): INR 10,000

Even with full Input Tax Credit of INR 10 lakh → INR 10,000 must be paid via cash ledger.

Due to Central Goods and Services Tax (CGST) Rules, 2017 Rule 86B—Cash Flow Impact on Businesses : Even genuine taxpayers may feel the impact of increased working capital requirements, the need for advance cash planning, possible strain on cash-strapped businesses, & the need to integrate 1% cash rule into budgeting

In Summary: Judicial Interpretation

Courts have generally upheld Rule 86B as a reasonable & non-arbitrary restriction, a valid anti-evasion measure, and acceptable if exemptions are properly applied. Central Goods and Services Tax (CGST) Rules, 2017 Rule 86B enforces a minimum cash outflow to discourage fake Input Tax Credit claims while safeguarding genuine taxpayers through multiple exemption pathways. Central Goods and Services Tax (CGST) Rules, 2017 Rule 86B is a targeted anti-evasion measure aimed at blocking misuse of Input Tax Credit. While it increases cash flow obligations, it affects only high-turnover cases and includes multiple safeguards to protect genuine taxpayers. Understanding its provisions and tracking exemptions ensures smooth and compliant Goods and Services Tax operations.  Consolidated Exemption Table