Rule 86B of the CGST Rules restricts businesses from using Input Tax Credit (ITC) to pay more than 99% of their output tax liability if their taxable turnover (excluding exempt and zero-rated supplies) exceeds ₹50 lakhs in a month. This mandatory rule requires at least 1% of the monthly tax liability to be paid in cash.
When Does Rule 86B Apply? Rule 86B applies only to businesses that meet both of the following conditions: Monthly taxable turnover exceeds ₹50 lakhs (excluding exempt and zero-rated supplies). The taxpayer is not covered by any of the specified exceptions (listed below).
Rule 86. (1) The electronic credit ledger shall be maintained in FORM GST PMT-02 for each registered person eligible for input tax credit under the Act on the common portal and every claim of input tax credit under the Act shall be credited to the said ledger.
Exceptions to the Rule:
1 lakh as Income Tax under Income Tax Act, 1961 in each of the last two financial years for which the time limit to file the income tax return under Section 139(1) of the said Act has expired: The registered person. Proprietor, karta or Managing Director of the registered person.
Rule 86B was introduced to prevent fraud and misuse of the input tax credit. It provides that registered persons shall not use ITC to discharge more than 99% of their output tax liability if the value of taxable supply (excluding exempt and zero-rated supply) exceeds Rs. 50 lakhs in a month.
If the department finds intentional non-compliance, a penalty of ₹10,000 or the amount of tax evaded (whichever is higher) can be imposed.
Barring of GST Return on expiry of three years
The GST network issued another advisory on 7th June 2025, implementing the rule of time-barring of GST return filing beyond three years from the due date. By this update, taxpayers will not be able to file GST returns after three years from the due date of such return.
The following category of tax persons are exempted from payment of 1% of GST in Cash 1. Registered taxpayers who have paid income tax above Rs 1.00 in Income Tax during the last two years continuously 2. Taxpayers who have zero-rated supplies without payment of duty and claimed refund of more than Rs 1.00 lac 3.
The government has introduced Rule 86B to the GST rules to prevent tax evasion. The new rule mandates that businesses with a monthly turnover over 50 lakh rupees must pay 1% of their GST liability in cash, while the remaining 99% can be paid using input tax credits as before.
ITC is not available for goods that are lost, stolen, destroyed, written off, or given as gifts or free samples. Businesses must account for such scenarios in their records, acknowledging the ineligibility of ITC on these items.
Rule 86B was introduced through Notification No. 94/2020-Central Tax dated December 22, 2020, and became effective from January 1, 2021. The primary objective behind this rule was to combat tax evasion and fraudulent practices that had emerged under the GST system.
The New GST Rate Structure
The old four-slab structure (5%, 12%, 18%, 28%) has been simplified. The 12% and 28% slabs were eliminated and replaced with a new structure, which is now primarily 0%, 5%, 18%, and a 40% rate for luxury and “sin” goods.
1st October 2022, Rule 86B was ultra vires to the CGST Act as it lacked the requisite legislative foundation to impose restrictions on the utilization of ITC.
Businesses with annual sales of Rs. 40 lakhs or more for goods, and Rs. 20 lakhs or more for services, must register for GST. If the turnover exceeds the allowed threshold, there is a penalty for failing to register under GST.
With Rule 86B in force:
Working out your GST turnover
Your GST turnover is your total business income (not your profit), minus: GST included in sales to your customers. sales to associates that aren't for payment and aren't taxable. sales not connected with an enterprise you run.
Under Rule 86B, applicable registered persons cannot utilize ITC exceeding 99% of their total output tax liability. In simpler terms, businesses with a monthly taxable turnover above ₹50 lakh are required to pay at least 1% of their output tax liability in cash.
The application of Rule 86B has been scrutinized in cases where taxpayers faced restrictions on utilizing their ITC. The courts have ruled that while the rule aims to curb fraudulent claims, it should not unduly hinder genuine taxpayers from accessing their entitled credits.
Rule 86B of the CGST Rules provides for the issuance of refund vouchers by registered taxpayers in cases where they are entitled to a refund of taxes paid. The refund voucher serves as a certificate of entitlement to a refund and can be used to claim the refund.
What is the Minimum Turnover Limit for GST Registration? Businesses are required to register for GST and pay tax on their annual turnover if their annual revenue exceeds Rs. 40 lakhs in the case of goods supplied and Rs. 20 lakhs for the supply of services.
Section 269ST limits cash receipts to Rs. 2 lakh or more in a single day from a single person. Any cash payment or receipt exceeding this limit is prohibited.
The shift to a two-slab system of 5% and 18%, removing the earlier 12% and 28% rates, will make taxation more transparent and easier to follow. At the same time, a 40% on luxury and sin goods such as pan masala, tobacco, aerated drinks, high-end cars, yachts, and private aircraft ensures fairness and revenue balance.
GST is leviable only if aggregate turnover is more than 20 lacs. (Rs. 10 lacs in 11 special category States). For computing aggregate supplies turnover of all supplies made by you would be added.
Yes, from 1st July 2025, PAN-Aadhaar linking is compulsory for all new PAN applications. Q. What is the last date to file ITR for non-audit cases in 2025? The income tax return (ITR) deadline for non-audit taxpayers is extended to 15 September 2025.