By CA Surekha S Ahuja
Section 86B of GST: The Practical, Legal & Defensive Guide for Businesses — Your Rights When the Department Overreaches
Section 86B has quietly become one of the most misunderstood provisions of the GST law. Many businesses are suddenly asked to pay a larger portion of their liability in cash, even when ample ITC exists in their books. Notices quote the provision without properly applying its exceptions, triggering unnecessary cash-flow stress and even demands that are legally incorrect.
This article gives you the cleanest, strongest, and most defensible understanding of Section 86B, along with legal interpretation, practical safeguards, and remedies when the department stretches the provision beyond the law.
The Core of Section 86B — The True Legal Position
Section 86B states that if the taxable turnover in a financial year exceeds ₹50 lakh, the registered person shall use at least 1% of the GST liability in cash, even if full ITC is available.
However, the law simultaneously provides broad and powerful exceptions.
If any one of the following applies, Section 86B cannot be invoked:
Statutory Exceptions
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The taxpayer has paid income tax of more than ₹1 lakh in each of the last two financial years.
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The taxpayer has received refunds exceeding ₹1 lakh on zero-rated supplies or inverted duty.
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The taxpayer is a government department, PSU, local authority, or statutory body.
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The managing partners/karta/proprietor have discharged income tax of more than ₹1 lakh in each of the last two years (as per Rule 86B’s structure).
Meaning:
If you or your business have paid income tax above ₹1 lakh in the last two years, Section 86B simply does not apply — and no officer can force it.
Linking GST with Income Tax — The Legal Interpretation That Matters
Section 86B is unique because it links a GST input restriction with income tax compliance history. The rule is designed to identify taxpayers with no income tax footprint, flagging them for higher scrutiny.
Therefore, the real trigger is:
Not turnover — but low or zero income tax in two consecutive years despite high outward supplies.
If the business has genuine profitability, pays regular taxes, or has historical refunds, the intention of Section 86B is already satisfied.
Common Overreach by the Department — Where Problems Begin
Field officers frequently invoke Section 86B mechanically, without verifying:
• past income-tax payments
• refund records
• nature of turnover
• exception conditions
• whether partners’ or proprietor’s ITR qualifies
This results in:
• blocking of ITC
• wrongful demands to pay 1% in cash
• system-generated notices without legal basis
• scrutiny-like questions under the guise of 86B
These actions are not supported by law and can be contested.
Your Strongest Legal Arguments When the Department Misapplies Section 86B
Argument 1 — Income Tax > ₹1 lakh automatically exempts the taxpayer
No discretionary authority exists once this statutory condition is met.
Argument 2 — Section 86B cannot override the fundamental right to ITC
Courts have repeatedly held that ITC is a statutory right; restrictions must be interpreted strictly and cannot be expanded by administrative direction.
Argument 3 — Burden of proving ineligibility lies on the department
The officer must prove that none of the exceptions under 86B apply.
Argument 4 — Turnover alone cannot trigger 86B
Exception conditions must be evaluated before insisting on cash payment.
Argument 5 — ITC cannot be denied on the basis of suspicion
If returns are regularly filed and taxes paid, imposing 86B is arbitrary.
Argument 6 — System-generated intimation is not a lawful basis for demand
86B cannot be mechanically triggered unless exception conditions are examined.
5. Safest Compliance Routes to Stay Fully Protected
1. Ensure income-tax consistency
Keep at least ₹1 lakh income tax discharged in each of the last two years (through advance tax, SA tax, or TDS). This single step neutralizes Section 86B.
2. Maintain documentation of refund sanctions
Copies of refund orders > ₹1 lakh for any year protect you automatically.
3. Keep partners’ and proprietor’s ITR copies ready
In partnerships and HUFs, their income-tax payment satisfies exception conditions.
4. Maintain a dashboard showing exception applicability
A simple compliance sheet stating the reason why 86B does not apply can be produced to any officer.
5. If turnover exceeds ₹50 lakh but tax payments are low
Plan income-tax payments strategically to maintain eligibility.
6. Avoid temporary spikes in turnover without corresponding tax declaration
This usually triggers automated scrutiny.
If the Department Still Stretches 86B — Your Best Remedies
Remedy 1: Respond with a legal representation quoting exception clauses
Attach documentary evidence:
• last two years’ ITR
• refund orders
• balance sheets showing tax payments
Remedy 2: Request revocation of wrongful system-blocks
Cite that 86B is a conditional restriction, not automatic.
Remedy 3: Use the “principles of natural justice” argument
The officer must evaluate facts before applying a restriction that impacts working capital.
Remedy 4: Appeal under Section 107
If a demand or restriction persists, the first appeal has strong merit because 86B exceptions are objective and provable.
Remedy 5: Writ petition where department misuses discretion
High Courts have granted relief where ITC denial or cash compulsion is mechanical or contrary to explicit rule exceptions.
Remedy 6: Seek rectification under Section 161 for system errors
Many 86B triggers arise from incomplete data pulled by the portal; rectification is allowed.
What Businesses Should Never Do (Critical to Avoid Red Flags)
• Do not suppress outward supplies hoping to avoid the ₹50 lakh threshold
• Do not ignore repeated requests for ITR copies; respond with proper exception documentation
• Do not pay “voluntary” cash if you legally fall under an exception
• Do not allow the officer to treat section 86B as a penalty provision (it is not)
Conclusion: Section 86B Is a Targeted Rule — Not a Blanket Restriction
Section 86B is designed to curb fake turnover and fraudulent ITC — not to penalize genuine taxpayers.
If your income tax, refunds, or partner-proprietor tax history satisfies the exceptions, you are legally outside the scope of 86B, regardless of turnover.
