When Does the Rule GST 86B Apply & Who Exempted?

Goods and Services Tax (GST) has streamlined the indirect taxation system in India, but it also brings with it several rules and compliance requirements. Among them, Rule 86B of the CGST Rules 2017, introduced in December 2020, has garnered considerable attention and debate. This rule aims to curb tax evasion, but it also impacts working capital and cash flow for legitimate businesses.

In this blog, we'll break down what GST Rule 86B is, whom it affects, its implications, exceptions, and compliance tips for businesses.

What is GST Rule 86B?

Rule 86B restricts the use of the input tax credit (ITC) available in the electronic credit ledger for discharging GST liability. Under this rule, a taxpayer cannot use ITC to pay more than 99% of their output tax liability in certain cases. This means at least 1% of the tax liability must be paid in cash, even if there is sufficient ITC available.

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).
• This threshold ensures that only relatively larger businesses are brought under the purview of this rule.

Who is Exempted from Rule 86B?

To balance compliance and ease of doing business, Rule 86B provides several exemptions. It does not apply if:

• The registered person or any of its key persons (proprietor, managing director, partner, etc.) has paid more than ₹1 lakh in income tax in each of the last two financial years.
• The registered person has received a refund exceeding ₹1 lakh in the previous financial year on account of unutilized ITC due to.
• Exports without payment of tax (under LUT/bond).
• Inverted duty structure (where input tax rate > output tax rate).
• The registered person has discharged output tax liability in cash exceeding 1% of the total output tax liability cumulatively up to the relevant month in the current financial year.
• The registered person is a government department, public sector undertaking (PSU), local authority, or statutory body.

These exemptions ensure that genuine and compliant taxpayers are not unduly burdened.

Why Was Rule 86B Introduced?

The primary intent behind Rule 86B is to curb fake invoicing and tax evasion. There have been numerous cases where businesses claimed large amounts of ITC based on fake invoices without any actual supply of goods or services. By enforcing a minimum cash component in tax payment, the government aims to ensure a trail of real transactions and discourage fraudulent practices.

Implications for Businesses

While Rule 86B targets tax evaders, it has implications for genuine businesses as well:

1. Working Capital Impact

Businesses that rely heavily on ITC for their GST liabilities may face cash flow challenges, especially if they operate in low-margin or capital-intensive sectors.

2. Compliance Burden

Businesses must monitor turnover thresholds, tax payments, and exemptions regularly to determine applicability and ensure compliance.

3. Cash Management

Companies need to plan their tax payments and working capital more effectively to ensure they have enough liquidity to pay at least 1% of tax liability in cash.

Compliance Tips for Businesses

1. Track Monthly Turnover: Keep a close watch on your monthly taxable turnover to determine if you cross the ₹50 lakh threshold.
2. Review Tax Payments: Ensure at least 1% of output tax liability is paid in cash periodically to stay exempt.
3. Maintain Proper Documentation: File income tax returns timely and ensure directors/proprietors meet the ₹1 lakh tax payment threshold to remain exempt.
4. Use Accounting Software: Many GST software solutions have built-in alerts for Rule 86B applicability and can automate compliance checks.
5. Consult with GST Experts: When in doubt, consult a GST practitioner or CA to ensure accurate interpretation and application of the rule.

Conclusion

GST Rule 86B introduces certain cash flow considerations, the exemptions provided help cushion the impact for most honest taxpayers. Businesses should treat Rule 86B as a reminder to maintain transparent accounting, plan finances efficiently, and stay compliant with both GST and income tax laws. If you need any assistance contact CRSPL experts Today! Proactive compliance not only avoids penalties but also builds a strong foundation for sustainable growth in a regulated environment.