The 1 % Cash‑Payment Rule under GST (Rule 86B) – A 360° Guide for 2025

1  Backdrop – Why was Rule 86B born?

Within three years of GST’s launch, the tax administration was battling an epidemic of fake‑invoice networks that generated paper credits with no underlying supply. The Council therefore recommended a ‘skin‑in‑the‑game’ requirement: every large taxpayer must part with at least one per cent of her monthly output tax in cash. The mandate was notified via Notification 94/2020‑CT dated 22 December 2020, inserting Rule 86B in the CGST Rules with effect from 1 January 2021.

2  Statutory Matrix

Layer	Provision	What it says	Practical take‑away
Primary Act	Section 49(12) (yet to be notified)	Empowers Government to cap the proportion of output tax that can be discharged through ITC	Provides enabling power for rules like 86B.
Sub‑rule	Rule 86B	Blocks utilisation of ITC beyond 99 % where monthly taxable turnover > ₹50 lakh	Mandates minimum 1 % cash payment.
Enforcement links	Rule 21(g) (cancellation) & Rule 59(6)(f) (GSTR‑1 blocking)	Non‑compliance can suspend filing rights & even registration.

3  Who falls in the net?

A registered person whose value of taxable outward supplies (excluding exempt & zero‑rated supplies) exceeds ₹50 lakh in ANY month must self‑check Rule 86B before filing GSTR‑3B. The test is month‑specific—cross the threshold even once, and the rule kicks in for that tax period.

Tip for MSMEs: Turnover for LUT exports or entirely exempt goods is ignored when testing the limit.

4  Bright‑line Exceptions (Meet any one to escape)

1. Income‑tax criterion – The entity or key managerial persons (proprietor/karta/MD/any two partners/whole‑time directors or trustees) paid income‑tax > ₹1 lakh in EACH of the last two completed FYs .
2. Export refund test – LUT/Bond – Received GST refund > ₹1 lakh last FY for zero‑rated exports (s.54(3)(i)) .
3. Inverted‑duty refund test – Received refund > ₹1 lakh last FY under s.54(3)(ii) .
4. Cumulative cash already paid – In the current FY you have already discharged > 1 % of total output tax in cash up to that month .
5. Entity‑type safe harbour – Government department, PSU, local authority or statutory body .
6. Commissioner’s relaxation – Discretionary waiver after verification .

5  How the 1 % is computed

• Base: Monthly output tax—not turnover.
• Exclusions: RCM liability is outside the scope because it is already paid in cash.
• Ledger logic: System allows ITC utilisation up to 99 % of the figure in GSTR‑3B; balance must be debited from the electronic cash ledger.

Illustration

Particulars	Amount (₹)
Taxable supplies (July 2025)	80,00,000
Output GST @18 %	14,40,000
Available ITC	20,00,000
Minimum cash to be paid (1 %)	14,400
ITC that can be utilised	14,25,600

Once the taxpayer, during FY 2025‑26, cumulatively pays ₹2 lakh in cash against output tax (exceeding 1 %), Rule 86B auto‑switches off for the remainder of the year.

6  Workflow in the GST portal

1. System validation runs when GSTR‑3B is prepared.
2. If 1 % cash not met, portal blocks offsetting beyond 99 % and flashes an error.
3. Failure to comply may trigger Rule 21(g) resulting in suspension/cancellation and portal will block GSTR‑1 filing in subsequent month through Rule 59(6)(f) .

7  Interplay with other Credit‑blocking provisions

Provision	Purpose	Interaction with Rule 86B
Rule 86A	Officer‑initiated blocking of specific ‘fraudulent’ credits for 1 year	Can operate simultaneously; 86B is self‑executing while 86A is officer‑driven.
Rules 88C & 88D	Auto‑intimations for tax liability or excess ITC & GSTR‑1 blocking if unresolved	Separate deterrent; Rule 59(6) now cites both 86B and 88C/D conditions.

8  Judicial & Policy Developments (2024‑25)

• Himachal Pradesh High Court (Oct 2024) – In XYZ Industries v. State of HP, the Court opined that Rule 86B may be ultra vires for lack of explicit statutory backing, though final relief is pending ).
• Madras High Court (Feb 2025) – Set aside reversal merely for procedural lapse, held that personal hearing is required before denying ITC under 86B ).
• Industry Representation (Apr 2025) – Tax professionals sought deletion/relaxation of Rule 86B citing working‑capital stress ).
• Finance (No. 2) Act 2024, s.49(12) notified prospectively (expected mid‑2025) to give stronger primary‑law footing to such restrictions—stakeholders should watch for aligned amendments.

Status quo: As on 11 July 2025, no substantive amendment to the text of Rule 86B has been notified; only portal validations and legal challenges have evolved.

9  Practical Scenarios & FAQs

Q1 – My July turnover crosses ₹50 lakh for the first time; do I need to pay cash?
Yes, if no exception applies, 1 % of July’s output tax is payable in cash.

Q2 – We are start‑up founders who paid ₹1.2 lakh each as income‑tax last two FYs; company itself paid nil.
Still exempt—the test looks at either the entity or specified individuals .

Q3 – Does the 1 % include cess?
No, cess is a separate levy; but for practical purposes the portal aggregates total output tax when applying the 99 % cap.

Q4 – What if I mistakenly utilise 100 % ITC and file?
Return can be re‑opened & cash paid via DRC‑03; delay invites interest and could freeze GSTR‑1 filing.

10  Strategic Considerations for CFOs

Action item	Why it matters
Early cash‑flow forecasting	Ensure cash ledger topped‑up before 20th of the month.
Track cumulative cash‑paid %	Once > 1 % is reached, use ITC fully and free up working capital.
Maintain income‑tax challans & refund orders	Key documents to substantiate exemption during audits.
Automate GSTR‑3B validation	ERP integrations can flag 86B breach before portal rejects.
Monitor litigation	If constitutional challenge succeeds, policy may change quickly—build clauses in contracts.

11  Take‑aways for the Common Man

Rule 86B sounds technical, but it simply means: if a business is really large (₹50 lakh sales a month), the Government wants a token 1 % real‑money payment so that only genuine operators remain in the system.

For small traders and most service providers below that threshold, nothing changes. For exporters and Government bodies, relief already exists.

12  Conclusion

Rule 86B is a targeted anti‑evasion weapon rather than a revenue measure. While it nudges liquidity out of the electronic credit ledger, taxpayers can neutralise the pain by planning cash flows, documenting exemptions and leveraging the cumulative 1 % override. With statutory backing now being cemented and courts actively reviewing proportionality, 2025‑26 could witness further fine‑tuning. Businesses should therefore stay vigilant, keep evidence ready, and automate compliance to ensure that a mere 1 % rule does not snowball into a 100 % headache!