Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
A growing business with plenty of ITC finds GSTR-3B still asks for a cash payment every month and the CA student cannot explain why.
Rule 86B caps the use of the electronic credit ledger at 99 percent of output tax when monthly taxable supplies, excluding exempt and zero-rated supplies, exceed ₹50 lakh, unless an exception applies.
A monthly check of taxable supply value against ₹50 lakh, a list of which exceptions the business meets, and a cash forecast of 1 percent of output tax before the 20th.
The cash floor is known in advance, funds are in the cash ledger before filing, and excess credit is carried forward without surprise.
If your taxable outward supplies in a month (excluding exempt and zero-rated supplies) exceed ₹50 lakh, Rule 86B of the CGST Rules, 2017, stops you paying more than 99 percent of your output tax from input tax credit (ITC). So at least 1 percent of the tax goes in cash, unless one of the listed exceptions applies. The unused credit is not lost; it carries forward.
Why does the rule exist?
Rule 86B was inserted from 1 January 2021 to curb fake invoicing. Some businesses were paying all their tax from credit built on invoices with no real supply. A small cash floor means every large business pays something in cash each month, unless it has a track record that shows it is genuine.
Who is exempt from the 1 percent cash rule?
The rule does not apply where, in plain terms:
- The proprietor, partners, Karta, managing director or the company itself paid income tax above ₹1 lakh in each of the last two financial years.
- The business received a refund above ₹1 lakh in the previous financial year for exports or supplies to an SEZ without paying tax.
- The business received a refund above ₹1 lakh in the previous financial year because of an inverted duty structure.
- The business has already paid more than 1 percent of its total output tax in cash, cumulatively, during the current financial year up to that month.
- The taxpayer is a government department, public sector undertaking, local authority or statutory body.
The Commissioner can also lift the restriction after verification. Check the full rule text before relying on an exception.
When does the cash floor apply?
| Situation | Monthly taxable supplies | ITC compared with output tax | Cash payable |
|---|---|---|---|
| Below the limit | ₹40 lakh | Any | Only the normal shortfall, no floor |
| Above the limit, modest ITC | ₹3 crore | ITC is 80 percent of output tax | 20 percent; the floor does not bite |
| Above the limit, large ITC | ₹3.5 crore | ITC is above 99 percent of output tax | Exactly 1 percent of output tax |
| Above the limit, exception applies | ₹3.5 crore | Any | Only the normal shortfall |
The floor matters only when your credit would otherwise cover more than 99 percent of the tax.
Worked example
A distributor in Indore has, for September, taxable supplies of ₹3,50,00,000. Output GST is ₹60,00,000. ITC available is ₹59,50,000. No exception applies.
| Line | Amount |
|---|---|
| Output GST | ₹60,00,000 |
| Maximum ITC usable: 99 percent of ₹60,00,000 | ₹59,40,000 |
| Cash payable: 1 percent of ₹60,00,000 | ₹60,000 |
| ITC available | ₹59,50,000 |
| ITC carried forward | ₹10,000 |
Check: ₹59,40,000 + ₹60,000 = ₹60,00,000, and ₹59,50,000 minus ₹59,40,000 = ₹10,000. Without Rule 86B, the distributor would have paid only ₹50,000 in cash. The rule moves ₹10,000 from credit to cash this month.
Remember the set-off order still applies inside the 99 percent. If credit is stuck in the wrong head, cash payable can be higher than 1 percent.
How do I plan cash for the 20th when Rule 86B applies?
- By the 15th, total the month’s taxable supplies and output tax.
- If supplies cross ₹50 lakh and no exception applies, set aside at least 1 percent of output tax.
- Add any shortfall from the set-off order.
- Deposit the amount into the electronic cash ledger through a PMT-06 challan a few days before the 20th.
What to read next
- Next in this series: GSTR-1 vs GSTR-3B runbook for the last five days before filing
- Fitting it into close: month-end close reconciliation checklist
- Earlier in this series: Why can’t I use SGST credit to pay CGST?
- Matching at volume: GST reconciliation software
GSTR-1 and GSTR-3B matching leads the TransactIG GST roadmap.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →