Cash Payment Compulsion Under Rule 86B Despite Full ITC Discharge – Legal Analysis

Rule 86B of the Central Goods and Services Tax Rules, 2017, brought in through Notification No. 94/2020 dated 22-12-2020 and applicable from January 2021, introduced a significant restriction on the manner in which a registered person may utilise the balance in the electronic credit ledger. While it was framed as an anti-evasion mechanism, its interaction with substantive provisions of the CGST Act has raised a crucial question:

Can the department demand additional tax payment in cash under Rule 86B when the entire output tax liability has already been discharged by using valid input tax credit?

This article examines the legal framework, the nature of Rule 86B, the scope of recovery provisions under the CGST Act, and the judicial view of the Himachal Pradesh High Court, to conclude whether cash recovery is sustainable where there are no tax dues, but only an alleged breach of Rule 86B.

Statutory Text of Rule 86B – Restriction on Use of Electronic Credit Ledger

Rule 86B, as inserted, reads as follows:

“86B. Restrictions on use of amount available in electronic credit ledger.-
Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:

Provided that the said restriction shall not apply where –
(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or
(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or
(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or
(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or
(e) the registered person is –
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii) a local authority; or
(iv) a statutory body:
(f) the registered person other than a manufacture shall be exempted from the provision of this rule only in respect of goods specified under rule 31D, on which the tax has been paid by the supplier on the basis of retail sale price:”

In essence, if a registered person’s taxable outward supplies in a month (excluding exempt and zero-rated supplies) exceed ₹50 lakh, he cannot ordinarily utilise more than 99% of his output tax liability through ITC; at least 1% must be paid in cash through the electronic cash ledger, unless covered by one of the specified exceptions.

Policy Objective Behind Rule 86B – Anti-evasion, Not Revenue Augmentation

The background to Rule 86B indicates that it was conceived as a preventive measure against:

• Fake invoicing arrangements,
• Bogus or fraudulent input tax credit,
• Circular trading of invoices without actual supply,
• Situations where the assessee avails ITC on invoices issued by non-genuine suppliers who do not pay tax to the Government.

By mandating a minimum 1% payment in cash once a specified supply threshold is crossed, the rule seeks to ensure some degree of revenue flow and to create a deterrent against entities that operate solely on paper credits.

However, the rule operates on a presumption that every assessee crossing the threshold could be involved in suspicious transactions. Consequently, even fully compliant assessees with genuine ITC, backed by actual tax payment by suppliers, are forced to part with cash to satisfy this procedural requirement.

Entitlement to Input Tax Credit Under the CGST Act

To evaluate whether a procedural rule can curtail ITC utilisation to the extent of creating an enforceable cash liability, it is essential to revisit the substantive provisions of the CGST Act governing ITC:

Section 16 – Right to Avail Input Tax Credit

Section 16 provides: