Handwritten Notes — Day 14
Three pages of handwritten notes covering Rule 86B — what triggers it, how the restriction works, and all 4 exemptions. Download with one click (watermarked with CA Devesh Thakur | eTaxSave.com).
📄 Note Page 1 — Rule 86B Overview & Case Facts
AAR overview, firm details, monthly turnover, income tax data & issues raised
📄 Note Page 2 — Rule 86B: The Restriction & How It Works
Notification No. 94/2020, effective date, ₹50 lakh trigger, 99% ITC limit, 1% cash mandate
📄 Note Page 3 — 4 Exemptions from Rule 86B
All 4 exemption categories: Income Tax, GST Refund, Cash GST already paid, Special Entities
Watch Day 14 — Rule 86B ITC Restriction
What is Rule 86B?
Rule 86B of the CGST Rules, 2017 is a restriction on the use of Input Tax Credit (ITC) from the electronic credit ledger. It was introduced vide Notification No. 94/2020 – Central Tax, dated 22nd December 2020, and became effective from 1st January 2021.
The primary objective of Rule 86B is to curb tax evasion, fraudulent ITC claims, and bogus invoicing under GST. Before its introduction, many businesses were fraudulently utilizing 100% of their ITC without paying any actual tax in cash.
📌 Rule 86B — Exact Legal Text (Key Extract)
“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.”
When Does Rule 86B Apply?
Rule 86B is triggered automatically when your monthly taxable turnover crosses a threshold. The calculation excludes exempt and export supplies.
🔗 How the 99% / 1% Split Works
4 Exemptions — Rule 86B Does NOT Apply If…
The proviso to Rule 86B provides 4 categories of exemptions. If any one of these conditions is satisfied, the registered person is fully exempted from the Rule 86B cash payment restriction and can use 100% ITC.
• Export with payment of tax (zero-rated supply), OR
• Inverted tax structure (where input tax rate > output tax rate)
• Government Department
• Public Sector Undertaking (PSU)
• Local Authority
• Statutory Body
⚠️ Key Point on Exemption 1 — Income Tax Threshold
- The ₹1 lakh income tax must be paid individually by the specified person — not cumulatively
- Applicable persons: Proprietor (for proprietorship), Karta (HUF), MD / WTD (company), Any Two Partners (partnership), Members of managing committee (AOP), Board of Trustees (trust)
- This is the most commonly claimed exemption — and the one at the center of the AAR ruling below
- The IT paid must be in each of the last two financial years (both years, not just one)
Landmark AAR Ruling — Rajasthan AAR, May 2025
Now let’s see how Rule 86B played out in a real case — M/s Aadinath Agro Industries, a partnership firm from Rajasthan, sought an Advance Ruling on whether they qualified for the Rule 86B exemption under category (a).
Rajasthan AAR vs M/s Aadinath Agro Industries
Firm’s Facts — Income Tax Data
The firm’s monthly taxable turnover exceeded ₹50 lakh, making Rule 86B applicable. The firm and its partners were utilizing 100% ITC. The firm applied for a ruling on whether their combined income tax payments qualified them for exemption.
| Entity / Partner | FY 2022-23 (₹) | FY 2023-24 (₹) | Individually > ₹1L? |
|---|---|---|---|
| The Firm | 0.00 | 0.00 | ❌ No |
| Partner 1 | 48,766 | 32,274 | ❌ No |
| Partner 2 | 90,072 | 72,153 | ❌ No |
| Partner 3 | 0.00 | 0.00 | ❌ No |
| Total (Firm + All Partners) | ₹1,38,838 | ₹1,04,427 | ✅ Cumulatively > ₹1L |
🔍 The Problem
No individual partner paid more than ₹1 lakh in income tax in either of the last two financial years. However, the firm and its partners together paid well above ₹1 lakh cumulatively. The applicant argued that this cumulative amount should qualify for the Rule 86B exemption.
Two Issues Raised Before AAR
Applicant’s Arguments — Why They Claimed Exemption
The CA (Mr. Mukesh Chordiya) advanced the following arguments on behalf of the firm:
AAR’s Reasoning — How They Decided
The Rajasthan AAR (Advance Ruling No. RAJ/AAR/2025-26/06, dated 23.05.2025) carefully examined the provisions of Rule 86B and ruled as follows:
The Ruling — Final Answer
Signed by: Utkarsha (Member, Central Tax) & Dr. Akhedan Charan (Member, State Tax) | Dated: 23/05/2025
Key Takeaways — What You Must Remember
✅ 5 Critical Points from Day 14
- Rule 86B applies when monthly taxable supplies (excluding exempt + zero-rated) exceed ₹50 lakh in a month — effective from 1st January 2021
- The restriction: Cannot use more than 99% of GST liability via ITC — must pay a minimum of 1% in cash via the electronic cash ledger
- Exemption (a) — Income Tax: The ₹1 lakh income tax threshold applies individually to each specified person (any two partners / MD / proprietor etc.) — cumulative computation of the firm + partners is NOT permitted
- AAR ruling (May 2025): Rajasthan AAR ruled against M/s Aadinath Agro Industries — confirmed that cumulative income tax of firm and partners cannot be clubbed for Rule 86B exemption. Each partner must individually exceed ₹1 lakh in each of both preceding financial years
- Practical tip: If you are a partnership firm with turnover exceeding ₹50 lakh/month, check that at least any two partners have individually paid > ₹1 lakh IT in each of the last 2 years — or plan to pay 1% GST in cash every month
🧠 Quick Memory Map — Rule 86B
- When: Monthly taxable T/O > ₹50 Lakh (excl. exempt + export)
- Restriction: Max 99% via ITC → Min 1% cash compulsory
- Introduced: Notification No. 94/2020-CT, w.e.f. 01.01.2021
- Exemption 1 (IT): Any 2 partners / MD / Proprietor individually paid > ₹1L IT in each of last 2 FYs
- Exemption 2 (Refund): GST refund > ₹1L last year (export / inverted duty)
- Exemption 3 (Cash paid): Already paid > 1% of GST in cash this FY cumulatively
- Exemption 4 (Entity): Govt Dept / PSU / Local Authority / Statutory Body
- AAR (May 2025): Cumulative IT of firm + partners — NOT eligible for exemption
