Introduction
Rule 86B of the CGST Rules, 2017 imposes a restriction on the utilization of Input Tax Credit (ITC) to discharge output tax liability, impacting high-turnover taxpayers - Monthly Turnover exceeding 50Lakhs.

Background / Legal Framework
Rule 86B was inserted vide Notification No. 94/2020 – Central Tax dated 22.12.2020, effective from 01.01.2021. It operates as an anti-evasion measure under the GST framework to curb fake invoicing and excessive ITC claims.

What is the Restriction?
A registered person is required to pay at least 1% of output tax liability in cash, if:

• Taxable turnover (excluding exempt and zero-rated supplies) exceeds ₹50 lakhs in a month

This effectively limits ITC utilization to 99% of output tax liability.

Key Features / Highlights

• Applicable on monthly taxable supplies > ₹50 lakhs

• Minimum 1% cash payment mandatory

• Applies GSTIN-wise, not PAN-wise

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• Restriction applies even if sufficient ITC is available

• Not applicable to:

  • Government departments, PSUs, local authorities, statutory bodies

  • Taxpayers with:

    • Income tax paid > ₹1 lakh in each of the last 2 financial years (for proprietor/partners/directors)

    • Refunds received > ₹1 lakh on account of exports/inverted duty

    • Cumulative cash payment exceeding 1% in the current FY

  • Certain notified persons

Practical Impact

• Working capital blockage due to forced cash payment

• Affects businesses with high ITC accumulation (e.g., traders, exporters)

• Creates compliance tracking burden at monthly level

• Can impact pricing/margin decisions in low-margin industries

There is also a structural concern: Rule 86B indirectly overrides the fundamental GST principle of seamless credit flow without any corresponding amendment in the Act.

Action Plan (What Should Taxpayer Do Now)

1. Monthly Turnover Monitoring - Track taxable turnover excluding exempt/zero-rated supplies.

2. Eligibility Check for Exceptions - Evaluate - Income tax paid status, Refund Status, Cash Payment Track Record.

3. Working Capital Planning - Budget for minimum 1% cash outflow where applicable.

4. Documentation Readiness - Maintain proof for exemption eligibility (IT returns, refund orders, etc.)

5. System Controls - Configure ERP/GST software to flag Rule 86B applicability automatically.

Conclusion
Rule 86B is a compliance-heavy provision aimed at preventing misuse of ITC, but it places an additional burden on genuine taxpayers. Businesses must proactively monitor thresholds and maintain proper documentation to avoid disruption.

For expert guidance on this topic, contact your tax professional today.