CGST Rule 86B Explained: The 1% Cash Rule Is on Output Tax, Not Turnover
Rule 86B does not impose a 1% tax on turnover. Where it applies, it restricts use of the electronic credit ledger to 99% of output tax liability for the month, subject to important exceptions.
Finin2min Summary
- The trigger generally looks at taxable supplies other than exempt and zero-rated supplies exceeding ₹50 lakh in a month.
- The restriction limits electronic-credit-ledger use to 99% of output tax liability.
- The resulting minimum cash is 1% of output tax liability—not 1% of turnover.
- Specified income-tax payment, refund, cumulative cash payment and government-related exceptions can switch the rule off.
- The test is monthly and entity-specific; one month's result does not settle the entire year.
- Document the exception relied upon because portal behaviour alone is not a legal conclusion.
The rule was introduced as an anti-fraud control for high-value taxable supplies funded almost entirely through input-tax credit. Its wording is compact but frequently misstated in threshold posters.
The finance team must test the trigger and exceptions GSTIN by GSTIN and month by month. Annual turnover by itself does not decide the rule.
The trigger
Rule 86B generally becomes relevant where the value of taxable supply other than exempt supply and zero-rated supply exceeds ₹50 lakh in a month. The exclusions in the trigger are important: export turnover and exempt supply should not be blindly added to the ₹50 lakh figure.
The test applies to the registered person and relevant tax period. Group turnover, annual turnover and invoice value answer other GST questions but are not substitutes for this monthly test.
What the 99% cap means
Where no exception applies, the registered person cannot discharge more than 99% of output tax liability through the electronic credit ledger. At least 1% of the output tax liability must therefore be paid through the electronic cash ledger.
This does not deny the underlying input tax credit permanently. It restricts its use for discharging that month's output liability, subject to the broader GST credit framework.
The major exception families
The rule contains exceptions connected with specified income-tax payments by the registered person or key persons, receipt of specified refunds in the preceding period, cumulative cash payment of more than 1% of output liability up to the relevant month, and government departments, public sector undertakings, local authorities and statutory bodies.
The precise look-back periods, monetary thresholds and persons covered must be read from the current rule. A board member's tax payment or a refund cannot be assumed to qualify without matching the wording.
Why cumulative cash payment matters
A business that has already discharged sufficient output tax in cash during the financial year may fall within an exception. The calculation is cumulative and should be supported by ledger evidence.
Systems should therefore maintain a month-wise Rule 86B workbook showing taxable-supply trigger, output tax, cash paid, refunds and income-tax evidence. Reconstructing this only after a notice is inefficient.
Common control failures
Businesses often apply 1% to turnover, include exports in the trigger, ignore separate GST registrations, treat an income-tax challan of an unrelated group company as qualifying, or assume that a portal-set cash amount proves the correct legal position.
The return preparer should document the exact exception and reviewer approval. Credit restrictions under other rules, such as blocked credit or supplier compliance, remain separate.
Worked Example
A GST registration has ₹80 lakh of domestic taxable supplies in a month, all at 18%. Output tax is ₹14.40 lakh. Available eligible ITC is ₹20 lakh.
If Rule 86B applies and no exception is available, electronic-credit-ledger use is capped at 99% of ₹14.40 lakh. Minimum cash payment is ₹14,400, not ₹80,000. The remaining ₹14,25,600 may be discharged through eligible credit, subject to other restrictions.
If the registration qualifies for an exception based on the current rule and evidence, the 99% cap may not apply for that month. The exception should be retained in the return workpaper.
Practical Checklist
- Calculate monthly taxable supplies after excluding exempt and zero-rated supply for the trigger.
- Determine output tax liability before applying the 99% credit-ledger cap.
- Test every exception using current wording and documentary evidence.
- Maintain cumulative cash-payment and refund records GSTIN-wise.
- Do not apply group-company evidence without checking eligible persons.
- Review Rule 86B separately from ITC eligibility and blocked-credit rules.
Article-Specific Q&A
Is the Rule 86B threshold ₹50 lakh annual turnover?
No. It generally tests specified taxable supplies exceeding ₹50 lakh in a month.
Is the mandatory cash payment 1% of turnover?
No. The restriction effectively requires at least 1% of output tax liability to be paid in cash where the rule applies.
Are exports included in the ₹50 lakh trigger?
Zero-rated supplies are excluded from the trigger wording. The current rule and transaction classification should be checked.
Can excess ITC be refunded because Rule 86B blocks its use?
Rule 86B alone does not create a general refund entitlement. Refund must fit a separate statutory category and conditions.
Does an income-tax payment by any director create an exception?
Only the persons, amount and period described in the rule qualify. Verify the current wording and evidence; do not generalise.
Is the cash test checked separately for each GSTIN?
The rule applies to the registered person, so separate registrations require their own monthly analysis, subject to legal interpretation of the facts.
Can the GST portal's computation replace a workpaper?
No. Portal validation is an operational control, not a complete legal analysis. Keep the trigger, liability and exception evidence.
Sources and Verification Trail
- CBIC Notification 94/2020: Official notification introducing Rule 86B and related changes.
- CGST Rules: Current official rule text and amendments.
- GST Portal ledgers: Official electronic cash and credit ledger records.
Editorial Note
This article is written for education and general awareness. Tax, regulatory and employment outcomes depend on facts, dates, notifications and documentation. Verify the current law and obtain professional advice before acting.
Keywords: Rule 86B · GST cash payment · input tax credit · GST compliance