What is Rule 86B ? Limit of Rule 86B ?

Section 86B actually refers to Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017. It restricts the use of Input Tax Credit (ITC) for payment of GST liability in certain cases.
Below is a detailed long note on Rule 86B useful for GST / accounting study or blog content.
Rule 86B of GST – Restriction on Use of ITC
1. Introduction
Rule 86B was introduced by the Government of India under the Central Goods and Services Tax Act, 2017 to control fake invoicing and misuse of Input Tax Credit (ITC).
This rule came into effect from 1 January 2021.
It restricts taxpayers from using 100% ITC to pay GST liability and requires a minimum portion of GST to be paid in cash.
2. Meaning of Rule 86B
Rule 86B states that:
If a registered taxpayer’s taxable supply exceeds ₹50 lakh in a month, then the taxpayer cannot use more than 99% of ITC to pay GST liability.
At least 1% of the GST liability must be paid in cash through the electronic cash ledger.
3. Objective of Rule 86B
The government introduced this rule to:
Prevent fake GST invoices
Stop fraudulent ITC claims
Improve GST compliance
Increase cash tax collection
Many businesses were paying 100% tax through fake ITC, so Rule 86B restricts that practice.
4. Applicability of Rule 86B
Rule 86B applies when:
Condition
Requirement
Monthly taxable turnover
More than ₹50 lakh
ITC utilization
Maximum 99% allowed
Cash payment
Minimum 1% compulsory
Example:
If GST liability = ₹10,00,000
Mode
Amount
ITC utilization
₹9,90,000
Cash payment
₹10,000
Minimum ₹10,000 must be paid in cash.
5. Exceptions to Rule 86B
Rule 86B does not apply in the following situations:
1. High Income Tax Payment
If the taxpayer or its directors paid income tax more than ₹1 lakh in last 2 financial years.
2. High GST Cash Payment
If the taxpayer paid more than 1% GST liability in cash cumulatively during the financial year.
3. Refund Claim Businesses
Businesses that claim refunds due to:
Export of goods
Export of services
Inverted duty structure
4. Government Entities
Rule 86B does not apply to:
Government departments
Public sector undertakings
Local authorities
Statutory bodies
6. Example of Rule 86B
Suppose:
Monthly taxable supply = ₹60 lakh
GST liability = ₹6 lakh
Then:
Particulars
Amount
ITC used
₹5,94,000
Cash payment (1%)
₹6,000
So at least ₹6,000 must be paid through cash ledger.
7. Advantages of Rule 86B
Reduces fake GST billing
Prevents fraudulent ITC claims
Improves GST transparency
Increases government tax collection
Controls shell companies
8. Disadvantages of Rule 86B
Increases working capital requirement
Creates cash flow issues for businesses
Compliance burden for genuine taxpayers
Small traders may face liquidity problems
9. Penalty for Non-Compliance
If a taxpayer violates Rule 86B:
GST department may block ITC
Demand tax through DRC-01 notice
Interest and penalty may apply
10. Simple Summary
Particular
Details
Rule Name
Rule 86B
Applicable under
CGST Rules
Effective Date
1 January 2021
Turnover Limit
₹50 lakh per month
ITC Usage
Maximum 99%
Cash Payment
Minimum 1%
✅ In simple words:
Rule 86B means that if a business has more than ₹50 lakh monthly turnover, it must pay at least 1% GST in cash, even if it has enough ITC

Comments

Post a Comment

Popular posts from this blog

what is E-Invoice ? how to generate E-Invoice ?

Image
E-Invoice (Electronic Invoice) is a system under Goods and Services Tax where a business generates an invoice on its system and then uploads it to the Invoice Registration Portal (IRP). The portal validates the invoice and provides a unique Invoice Reference Number (IRN) and QR Code. 👉 In simple words: E-Invoice = Invoice verified by GST system with IRN and QR code. 2️⃣ E-Invoice Limit (Turnover) E-Invoice is mandatory for businesses whose annual aggregate turnover exceeds ₹5 Crore in any financial year. Turnover E-Invoice Applicability Up to ₹5 Crore Not mandatory Above ₹5 Crore Mandatory 📌 Applicable for B2B transactions, exports, and some B2G transactions. 3️⃣ How to Generate E-Invoice? (Step-by-Step) Step 1 Create invoice in your accounting software / ERP. Step 2 Upload invoice details to IRP (Invoice Registration Portal). Step 3 IRP validates the invoice details with GST database. Step 4 IRP generates: IRN (Invoice Reference Number) Signed QR Code Step 5 Download the E-Invoice w...
Read more

what is Section 31 under CGST act ? why it is important for all taxpayers ?

Image
📘 Section 31 – Tax Invoice under CGST Act, 2017 🔹 Overview Section 31 of the CGST Act, 2017 deals with the issuance of tax invoices, bills of supply, and receipt vouchers. It specifies when, how, and by whom invoices must be issued for supply of goods or services. 🧾 1. Tax Invoice for Supply of Goods ✅ When to Issue? A registered person supplying taxable goods must issue a tax invoice: Before or at the time of removal of goods (if movement is involved) At the time of delivery (if no movement is involved) 📌 Example: If goods are shipped → Invoice before dispatch If goods are handed over directly → Invoice at delivery 💼 2. Tax Invoice for Supply of Services ✅ When to Issue? For services, invoice must be issued: Within 30 days from the date of supply of service For banks/financial institutions/NBFCs → within 45 days 📌 Important: Government may notify special timelines for certain services. 🚫 3. Bill of Supply (Instead of Tax Invoice) A Bill of Supply is issued instead of a tax invo...
Read more

What is Rule 86A under Cgst Act ?

Image
📘 Section 86A of CGST Act – Detailed Note 🔹 1. Introduction Section 86A CGST Rules ka ek important provision hai jo Government ko power deta hai ki wo fraudulent Input Tax Credit (ITC) ko rok sake. Ye rule Rule 86A of CGST Rules, 2017 ke naam se jaana jata hai (Act nahi, Rules ka part hai — ye point exam me important hota hai). 👉 Iska main purpose hai: Fake billing ko rokna Bogus ITC claims control karna Revenue loss prevent karna 🔹 2. Legal Provision (Basic Understanding) Agar kisi GST officer ko lagta hai ki taxpayer ne fraud ya galat tareeke se ITC liya hai, to wo: ➡ Electronic Credit Ledger (ECL) me available ITC ko ➡ Debit (use) karne se restrict kar sakta hai Iska matlab: 👉 Aapka ITC balance dikhega, lekin aap use nahi kar paoge 🔹 3. Conditions for Blocking ITC Officer tab ITC block kar sakta hai jab uske paas “reason to believe” ho ki ITC fraud hai. 📌 Major conditions: Fake Invoice Case Invoice kisi aise supplier se liya gaya jo exist hi nahi karta No Supply of Goods/Serv...
Read more