Rule 86B: Is the 1% Cash Payment Rule Valid, Refundable and Subject to Interest or Penalty?

Disclaimer: This article is for general information and academic discussion only. It does not constitute legal, tax or professional advice, and no view expressed here should be treated as a recommendation or as the position the author or the firm would take in any matter. The law on several points discussed below is unsettled and the facts of each case differ. Judgments are described as reported in the cited sources and must be read in full from the original orders before being relied upon. Readers should obtain professional advice on their specific facts.

Rule 86B of the Central Goods and Services Tax Rules, 2017 limits the use of the electronic credit ledger for discharging output tax, so that part of the liability must be paid in cash. Four questions are commonly raised about it: whether the rule was notified before the provision of the Act that supports it, how the cash paid can be recovered, whether interest is payable on a shortfall and whether penalty can be imposed. This article records the statutory position, the reported judicial decisions traced, and the views that can be taken on each question. The general operation of the rule is also covered in an earlier note on Rule 86B of the CGST Rules, 2017.

What Rule 86B provides

Rule 86B was inserted by Notification No. 94/2020-Central Tax dated 22.12.2020 and took effect from 01.01.2021. As described in commentary on the notification, where the value of taxable supplies in a month, excluding exempt and zero-rated supplies, exceeds Rs 50 lakh, the registered person cannot discharge more than 99% of the output tax liability through the electronic credit ledger. The balance has to be paid through the electronic cash ledger.

As described in the same commentary, the restriction does not apply where:

• the person, or specified office-bearers such as the proprietor, karta, managing director or partners, paid income tax exceeding Rs 1 lakh in each of the last two financial years;
• the person received a refund exceeding Rs 1 lakh in the preceding financial year on account of unutilised credit on zero-rated supplies without payment of tax or an inverted duty structure;
• cash paid through the electronic cash ledger cumulatively exceeds 1% of total output tax liability; or
• the person is a Government department, public sector undertaking, local authority or statutory body.

The rule also contains a power for the Commissioner to remove the restriction after verification. Rule 21(g) of the CGST Rules lists violation of Rule 86B among the grounds on which registration is liable to be cancelled. The exact text of the rule, including later amendments, should be read from the official notifications.

Was the rule notified before the enabling provision?

The dates. Rule 86B operated from 01.01.2021. Sub-section (12) of section 49 of the CGST Act, which provides for prescribing the maximum proportion of output tax liability that may be discharged through the electronic credit ledger, was inserted by the Finance Act, 2022. Notification No. 18/2022-Central Tax dated 28.09.2022 brought sections 100 to 114 of the Finance Act, 2022 into force from 01.10.2022, excluding clause (c) of section 110 and section 111. Commentary on the Finance Bill, 2022 described the proposed sub-section (12) as validating Rule 86B and described the amendment to section 49(4) as providing for prescribing restrictions on utilisation of the electronic credit ledger.

Views that can be taken.

• View 1 (rule lacked express statutory backing for the earlier period). Before 01.10.2022, section 49(4) referred to utilisation of the credit ledger “subject to such conditions” as may be prescribed, and the Act contained no express provision for a cap on the proportion of output tax dischargeable through credit. On this view, the general rule-making power in section 164 could not by itself supply a restriction of this kind, and the credit ledger balance represents tax already paid by the taxpayer.
• View 2 (rule was within rule-making power). The Government relied on the rule-making power in section 164 and on the purpose of curbing misuse of credit, as recorded in the judgment discussed below. On this view the rule was a condition on utilisation within section 49(4), and the later insertion of section 49(12) confirms, and does not create, the power.
• Open aspects. Whether section 49(12) operates only from 01.10.2022 or also supports the rule for the earlier period, and whether the amendment to section 49(4) is clarificatory, are matters on which no authoritative ruling was traced.

Reported High Court decisions traced

The following decisions were traced and checked against the sources linked. In each case only the matters reported in the source are stated, and the original order should be consulted.

Decision	What is reported	Source
A.M. Enterprises v. State of Himachal Pradesh, CWP No. 1517 of 2024, Himachal Pradesh High Court (Chief Justice M.S. Ramachandra Rao and Satyen Vaidya, J.), September 2024; reported as 2024 LiveLaw (HP) 62 and 2024 TAXSCAN (HC) 2099	The registration was cancelled for violation of Rule 86B. The Court recorded that the contention that Rule 86B has no statutory backing had force and that the rule appeared to be ultra vires the HPGST Act, noting that rules must have backing in the main statute and that the credit ledger amount is the taxpayer’s own. The issue was left open for consideration in an appropriate case. The petition was allowed on proportionality grounds, as the output tax liability had been discharged, and restoration of registration was directed. Section 49(12) is not mentioned in the reports consulted.	LiveLaw; Taxscan
Ujjwal Garg v. Commissioner, Department of Trade and Taxes, Delhi High Court (Vibhu Bakhru and Sachin Datta, JJ.); reported as [2024] 168 taxmann.com 50 (Delhi)	Registration was suspended in proceedings relating to non-compliance with Rule 86B. After the petitioner deposited Rs 80,000, the Court held that the suspension would not continue and directed restoration, observing that suspension has wide adverse ramifications for a taxpayer’s business. The validity of the rule was not decided in the report consulted.	Taxmann
Sri Shivsakthi Mercantile Pvt. Ltd. v. Assistant Commissioner (ST), Madras High Court; reported as 2025 taxguru.in 820	An order reversing 1% of input tax credit under Rule 86B was set aside for want of an opportunity of personal hearing, and the matter was remitted for fresh consideration, including the petitioner’s claim of exemption based on income tax paid. The merits and validity of the rule were not decided.	TaxGuru

No reported decision of the Supreme Court or of any High Court finally declaring Rule 86B valid or invalid was traced in the sources consulted. This statement is limited to the sources consulted and does not exclude unreported or more recent orders.

How can the amount paid in cash be recovered?

Statutory provisions. Section 49(6) of the CGST Act provides for refund of the balance in the electronic cash ledger in accordance with section 54. Section 54(1) provides for an application for refund of tax paid within two years from the relevant date. Refund of unutilised input tax credit is confined by section 54(3) to specified cases such as zero-rated supplies and inverted duty structure. As reported, CBIC Circular No. 166/22/2021-GST dated 17.11.2021 clarifies that the time limit in section 54(1) does not apply to refund of the excess balance in the electronic cash ledger (source).

Views that can be taken.

• View 1. Where the rule applies and the cash is applied towards the output tax liability, the amount is tax paid and is not an excess balance. An equal amount of credit remains in the electronic credit ledger and can be utilised in later periods.
• View 2. Where the rule is held to lack statutory backing for a period, the cash paid on that footing is claimable by way of refund of tax or other amount paid under section 54(1), subject to the two-year period, the relevant date and the unjust enrichment provisions, or through a writ petition.
• Open aspects. No reported decision was traced directing refund of cash paid under Rule 86B. Whether limitation can be extended where the rule is later held invalid is not addressed in any authority traced.

Is interest payable, and is it covered by section 50?

Statutory provisions. Section 50(1) requires a person liable to pay tax who fails to pay the tax or any part of it within the prescribed period to pay interest at the notified rate, not exceeding eighteen per cent. A proviso to section 50(1) provides that where the return for a tax period is furnished after the due date, interest is levied on that portion of the tax payable that is paid by debiting the electronic cash ledger. Neither section 50 nor Rule 86B refers expressly to interest on a shortfall in the 1% cash payment.

Views that can be taken.

• View 1 (interest leviable). The portion required to be paid in cash is tax payable in cash on the due date; if it is not paid in time, section 50(1) applies from the due date until payment.
• View 2 (interest not leviable, or limited). Where the liability was met through credit available in the ledger, nothing is unpaid in the sense of section 50(1), or interest at most extends to the cash component and not to the entire liability, in line with the proviso to section 50(1). In Voltech O&M Services Pvt. Ltd. v. Superintendent of GST, W.P. Nos. 6097 and 6098 of 2020 (Madras High Court, order dated 07.02.2023), as reported, the Court held that interest is payable on the cash component of the demand and not on the credit component (source). That decision concerned belated payment of tax in general and not Rule 86B.
• Open aspects. No reported High Court decision specifically on interest for non-compliance with Rule 86B was traced. The question is unsettled.

Is penalty leviable?

Statutory provisions. Rule 86B itself does not prescribe a penalty. Rule 21(g) makes violation of the rule a ground for cancellation of registration. Section 125 of the CGST Act provides that a person who contravenes any provision of the Act or the rules for which no penalty is separately provided is liable to a penalty which may extend to Rs 25,000. Sections 73 and 74 deal with determination of tax not paid or short paid, erroneously refunded or credit wrongly availed or utilised, and sections 122 and 132 deal with specified offences and prosecution.

Views that can be taken.

• View 1. Utilisation of credit beyond the permitted proportion is a contravention of the rules, attracting cancellation under Rule 21(g) and, where no other penalty is provided, the general penalty under section 125. Some commentators also suggest that the unpaid cash component may be demanded through proceedings under sections 73 or 74.
• View 2. Where the output tax was in fact discharged through credit that was available, no tax is unpaid or short paid and sections 73 and 74 are not attracted. Penalties under sections 122 and 132 require the specified offences or intent to evade tax, which a technical non-compliance does not by itself establish. In A.M. Enterprises, the Himachal Pradesh High Court, as reported, observed that cancellation was disproportionate where tax had been discharged and that a more proportionate penalty could have been imposed.
• Open aspects. No reported decision was traced squarely deciding which penalty provision applies to a violation of Rule 86B.

Frequently asked questions

From which date does Rule 86B apply?

Rule 86B was inserted by Notification No. 94/2020-Central Tax dated 22.12.2020 with effect from 01.01.2021.

From which date is section 49(12) of the CGST Act in force?

Section 49(12) was inserted by the Finance Act, 2022 and is reported to have come into force on 01.10.2022 under Notification No. 18/2022-Central Tax dated 28.09.2022.

Has any court finally decided the validity of Rule 86B?

No such decision was traced in the sources consulted. The Himachal Pradesh High Court in A.M. Enterprises recorded that the rule appeared to be ultra vires but left the issue open.

Does Rule 86B prescribe a penalty for violation?

The rule does not prescribe a penalty. Rule 21(g) lists violation of the rule as a ground for cancellation of registration, and section 125 provides a general penalty up to Rs 25,000 where no penalty is separately provided.

References and verification note

1. Notification No. 94/2020-Central Tax dated 22.12.2020 (Rule 86B), as described in commentary; the notification text was not reproduced in the source consulted.
2. Notification No. 18/2022-Central Tax dated 28.09.2022, GST Council website.
3. Finance Bill, 2022 amendments to section 49, as summarised in commentary. The enacted text of section 49(12) should be verified from the Finance Act, 2022.
4. Section 125, CGST Act, 2017, as reproduced on CAclubindia.
5. Section 50(1) and its proviso, as discussed in the ICAI Chartered Accountant Journal.
6. Judgments as cited in the table and the text above, through the sources linked there.

The decisions have been taken from secondary reports. Dates, bench details and holdings should be confirmed from the certified copies of the orders. Statutory text should be confirmed from the Act, Rules and notifications as amended up to date.

Disclaimer: The above is a compilation of statutory provisions, reported judgments and views for general information. It is not advice, does not express a conclusion on any matter and is not a substitute for professional advice on specific facts.

Arpan Bohra & Co., Chartered Accountants
Website: www.arpanbohra.co.in
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