These two anti-evasion rules empower the department to restrict misuse of credit and to prevent dummy invoicing.
## Rule 86A — Power to Block Credit Ledger
Who can act: Commissioner OR an officer authorised, not below the rank of Assistant Commissioner.
When can it be invoked: Officer must have reason to believe ITC was availed fraudulently or is ineligible, specifically:
#
Triggering Circumstance
(i)(a)
Invoice/debit note issued by a non-existent supplier or supplier not operating from declared place
(i)(b)
Invoice issued without actual receipt of goods/services
(i)(c)
Invoice for supply where tax has not been paid to the government
(ii)
Recipient availing ITC found non-existent / not at declared place
(iii)
Recipient does not possess valid tax-paying documents
Duration: Restriction lasts 1 year; can be withdrawn earlier by the Commissioner/authorised officer.
## Rule 86B — Mandatory 1% Cash Payment
Trigger: A registered person whose taxable supply (excluding zero-rated and exempt) in a month exceeds ₹50,00,000.
Rule: Maximum 99% of output tax liability can be discharged via ITC. At least 1% must be paid in CASH.
### Five Exceptions (Rule 86B will NOT apply)
#
Exception
1
Income tax paid > ₹1,00,000 in each of the LAST 2 FYs (for which ITR filing time u/s 139(1) has expired) by any of: Registered person / Proprietor / Karta / MD / two partners / WTD / member of managing committee / Board of Trustees
2
Received refund > ₹1,00,000 in preceding FY on account of unutilised ITC due to — (a) Zero-rated supply without payment of tax (Bond/LUT), OR (b) Inverted Duty Structure
3
Paid > 1% of cumulative YTD output tax liability through electronic cash ledger in the current FY (RCM payments excluded)
4
Specified persons: Government Dept / Local Authority / PSU / Statutory Body
5
Proper Officer removes restriction after due verification and safeguards
## Decision Tree for Rule 86B
```
Monthly taxable supply > ₹50 lakh?
├── No → Rule 86B not applicable
└── Yes → Check 5 exceptions
├── Any exception met? → Rule 86B not applicable
└── None met → 1% cash mandatory
```
Worked example
### Example 1
Example 1 — Application of Rule 86B
Given:
Output tax liability = ₹2,00,00,000
ITC available = ₹1,99,00,000
Rule 86B applies (no exceptions met)
Solution:
Particulars
Amount (₹)
99% of output tax (max ITC usable)
1,98,00,000
ITC available
1,99,00,000
Lower of above (actual ITC utilisation)
1,98,00,000
Cash payment (balance 1%)
2,00,000
Note: ITC of ₹1,00,000 (1,99,00,000 − 1,98,00,000) carries forward.
### Example 2
Example 2 — Cash Payment Exception
A company paid ₹1,50,000 in cash out of total tax liability of ₹60,00,000 till October 2024 in the current FY.
Conclusion: Rule 86B is NOT applicable in November 2024 because the >1% YTD cash payment exception is satisfied.
### Example 3
Example 3 — Income Tax Exception
XYZ Pvt. Ltd.'s MD paid income tax of ₹1,20,000 in FY 2023-24 and ₹1,50,000 in FY 2024-25. The company has a turnover triggering Rule 86B in FY 2025-26.
Conclusion: Since the MD paid > ₹1,00,000 income tax in each of the last 2 FYs (for which 139(1) time has expired), Rule 86B does NOT apply. The company may use up to 100% ITC.
⚠️ Common exam mistakes
Applying Rule 86B based on turnover including zero-rated and exempt supplies — exclude these; only consider TAXABLE supplies > ₹50 lakh per MONTH.
Counting RCM payments toward the 1%-YTD cash exception — RCM is specifically excluded.
Assuming the income tax exception applies if income tax was paid in only one of the last 2 years — it must be in EACH of the last 2 FYs.
Confusing Rule 86A (department blocks credit) with Rule 86B (taxpayer's self-cap on credit utilisation).
Treating Rule 86A restriction as permanent — it expires automatically in 1 year.
Forgetting that the ₹1 lakh refund exception requires refund due to Zero-rated (Bond/LUT) OR Inverted Duty Structure — not other reasons.
Bare-Act text Rule 86A and Rule 86B · CGST Rules, 2017 · click to expand
Rule 86B: 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 in each of the last two financial years for which the time limit to file return of income under section 139(1) 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 section 54(3); 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 section 54(3); 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, upto 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.