Rule 86B of GST – 1% Cash Payment, Exceptions, Calculation & Consequences

Rule 86B of GST was introduced to restrict excessive utilisation of Input Tax Credit (ITC) for payment of output tax and to ensure a minimum cash outflow by certain taxpayers. While the objective behind Rule 86B of GST is to curb tax evasion and fake invoicing, its implementation has had far-reaching practical implications for genuine businesses.

In routine GST compliance, many taxpayers—despite having sufficient ITC balance—end up paying their entire tax liability through the electronic credit ledger without realising that Rule 86B of GST mandates a minimum cash payment of 1% of output tax in specified cases. Such non-compliance often comes to light later during departmental verification or audit, leading to double payment of tax, blockage of working capital, and avoidable refund disputes.

This article explains Rule 86B of GST in a simple and practical manner, covering its applicability, exceptions, method of compliance, consequences of non-compliance, and the remedial mechanisms available when mistakes occur. The focus is on real-life compliance issues and solutions, rather than a purely theoretical reading of the law.

What is Rule 86B of GST?

Rule 86B of GST restricts the utilisation of Input Tax Credit (ITC) for payment of output tax in certain cases. Under this rule, eligible taxpayers cannot discharge their entire GST liability through ITC and are required to pay at least 1% of the output tax in cash.

Simply put, even if sufficient ITC is available, Rule 86B of GST mandates a minimum cash payment through the electronic cash ledger when the rule is applicable for a particular tax period.

The rule is applied on a monthly basis and is intended to ensure a minimum cash outflow, primarily to curb tax evasion and misuse of ITC.

To Whom is Rule 86B of GST Applicable?

Rule 86B of GST applies to registered persons who cross a specified turnover threshold during a tax period. The restriction becomes applicable when the value of taxable supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a month.

Once this threshold is crossed:

• The registered person cannot utilise ITC beyond 99% of the output tax liability for that month, and
• At least 1% of the output tax must be paid in cash through the electronic cash ledger.

It is important to note that Rule 86B of GST operates on a month-to-month basis. Even if the turnover exceeds the threshold in only one month, the restriction will apply for that particular tax period, unless the taxpayer falls under any of the specified exceptions.

This makes regular monitoring of monthly taxable turnover crucial to ensure timely and correct compliance with Rule 86B of GST.

Exceptions Provided under Rule 86B of GST

While Rule 86B of GST restricts utilisation of ITC beyond 99% of output tax liability, the rule itself contains specific statutory exceptions. Where any of the following conditions are satisfied, the restriction under Rule 86B of GST shall not apply.

Below is the exact text of the exceptions as provided in Rule 86B, along with a brief explanation for practical understanding:

 Additional Power of Relaxation

The rule further provides that:

“the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.”

Satisfaction of any one of the above conditions is sufficient to take the registered person outside the ambit of Rule 86B of GST for the relevant tax period.

If Cumulative Cash payment exceeds 1% then also rule 86B is not applicable.

One important exception under Rule 86B of GST is provided in Proviso (d), which works on a cumulative basis for the entire financial year. As per this provision, the restriction under Rule 86B does not apply if the registered person has discharged output tax in cash in excess of 1% of the total output tax liability, calculated cumulatively up to the relevant month.

This means that Rule 86B of GST does not mandate a fixed 1% cash payment every month. Once the cumulative cash payment exceeds 1% of the cumulative output tax liability, the restriction automatically ceases to apply for subsequent months, even if the monthly turnover continues to exceed ₹50 lakh.

For this calculation, it is important to note that total output tax liability refers to the aggregate of IGST, CGST, and SGST, and not each tax head separately.

We have prepared an excel file giving the example of this calculation for your better understanding which can be downloaded here.

👉 DOWNLOAD RULE 86B OF GST EXAMPLE EXCEL.

How to Comply with Rule 86B of GST?

Compliance with Rule 86B of GST is required at the time of filing GSTR-3B for the relevant tax period. Where the rule is applicable, the registered person must ensure that at least 1% of the total output tax liability is discharged through the electronic cash ledger.

From a practical standpoint, compliance involves the following:

• Monitor monthly taxable turnover to check whether it exceeds ₹50 lakh
• Compute total output tax liability by aggregating IGST + CGST + SGST
• Ensure minimum 1% payment in cash, unless covered under any exception
• Verify cumulative cash payment during the financial year to check eligibility under Proviso (d)
• File GSTR-3B carefully, ensuring correct split between ITC utilisation and cash payment

Since Rule 86B of GST operates month-wise but with cumulative exceptions, regular tracking of turnover, tax liability, and cash payments is essential to avoid inadvertent non-compliance and future disputes.

What Happens if Rule 86B of GST is Not Followed?

If Rule 86B of GST is applicable and the registered person discharges the entire output tax liability through ITC without making the mandatory 1% cash payment, it is treated as non-compliance with the rule.

In practical terms, this can lead to the following consequences:

• The department may require the taxpayer to pay the shortfall amount in cash, even though tax has already been paid through ITC
• Such payment is generally demanded to be made through DRC-03, resulting in a double payment of tax
• The excess utilisation of ITC may be viewed as irregular, leading to notices or objections during audit or scrutiny
• Working capital gets blocked, as the cash payment is made without automatic reversal or re-credit of ITC

It is important to note that, in most cases, there is no intention to evade tax—the issue arises due to procedural non-compliance. However, unless corrected properly, this procedural lapse can snowball into refund disputes and avoidable litigation.

Can Rule 86B Shortfall Be Paid through DRC-03?

Yes, in practice, where Rule 86B of GST has not been complied with and the mandatory 1% cash payment was missed, the department generally allows (or insists) that the shortfall be paid voluntarily through Form DRC-03.

DRC-03 is used for voluntary payment of tax and is commonly adopted to regularise procedural lapses under Rule 86B of GST. By paying the required amount in cash through DRC-03, the taxpayer aligns the compliance with the rule and avoids prolonged disputes at the audit or scrutiny stage.

However, a key practical issue arises here:

• The taxpayer has already discharged the full output tax liability through ITC
• Payment through DRC-03 results in cash payment without automatic reversal or re-credit of ITC
• This leads to a situation of double payment of tax—once through ITC and again in cash

Therefore, while payment through DRC-03 is an accepted corrective mechanism, it should be clearly understood that such payment is procedural in nature and does not represent any additional tax liability.

How Can Refund of Double Tax Payment under Rule 86B of GST Be Claimed?

When a taxpayer pays the shortfall under Rule 86B of GST through DRC-03, despite having already discharged the full output tax liability through ITC, it results in a double payment of tax—one through the electronic credit ledger and another through the electronic cash ledger.

Such excess payment is not a tax liability, but a consequence of procedural compliance. The GST law provides a mechanism to claim refund of this excess cash payment.

In practice, the refund is required to be claimed by:

• Filing a refund application in Form RFD-01
• Classifying the refund as “Excess payment of tax” mentioning that Full output tax liability was already discharged in GSTR-3B
• Additional payment was made through DRC-03 only to comply with Rule 86B of GST
• Attaching relevant documents such as: GSTR-3B copies, DRC-03 challan, Working showing double payment

The refund will be granted as a credit back to ITC credit ledger because the ITC was excessively utilized while payment of tax.

To Sum Up

Rule 86B of GST requires certain taxpayers to make a minimum cash payment despite having sufficient ITC. Though procedural, non-compliance can result in double payment and cash blockage. The rule provides clear exceptions, including a cumulative relief mechanism under Proviso (d). Any excess cash paid to regularise compliance can be claimed as refund with proper documentation. With correct tracking and timely action, unnecessary disputes under Rule 86B of GST can be avoided.

Disclaimer

This article is intended for general educational purposes only and is based on the provisions of Rule 86B of GST, relevant rules, and prevailing practices as on the date of writing. The content does not constitute legal, tax, or professional advice. The application of Rule 86B of GST may vary depending on the specific facts, figures, and compliance history of each taxpayer. Readers are advised to verify the applicable legal provisions and seek professional advice before taking any action based on this article.