Rule 86B of the Central Goods and Services Tax (CGST) Rules, effective from January 1, 2021, imposes a restriction on the utilization of Input Tax Credit (ITC) for certain taxpayers.
Applicability of Rule 86B
This rule applies to registered persons whose taxable supplies (excluding exempt and zero-rated supplies) exceed ₹50 lakh in a month. Under Rule 86B, such taxpayers cannot use ITC to discharge more than 99% of their output tax liability. In other words, at least 1% of the tax liability must be paid in cash.
Exceptions to Rule 86B
The restriction under Rule 86B does not apply in the following cases:
• High Income Tax Payments: If the taxpayer or key managerial personnel have paid income tax exceeding ₹1 lakh in each of the two preceding financial years
• Refund Recipients: Taxpayers who have received a refund exceeding ₹1 lakh in the previous financial year on account of unutilized ITC due to exports under LUT or inverted duty structure.
• Excess Cash Payments: If the taxpayer has discharged more than 1% of their total output tax liability in cash cumulatively up to the said month in the current financial year.
• Government Entities: Government departments, public sector undertakings, local authorities, and statutory bodies are exempt from this rule
Objective of Rule 86B
The primary aim of implementing Rule 86B is to curb tax evasion and the misuse of ITC through fake invoicing. By mandating a minimum cash payment of 1% of the output tax liability, the government seeks to ensure that businesses have genuine transactions and discourage fraudulent ITC claims