Interest on non-compliance with Rule 86B

[vaibhav agrawal]

A taxpayer did not comply with Rule 86B during FY 2022-23 and discharged 100% of output tax liability through eligible ITC instead of paying the mandatory 1% in cash.The Department is now demanding interest under Section 50 on the 1% shortfall from the original due dates.

However, the taxpayer had substantial balances in the Electronic Cash Ledger during the relevant period, including amounts deposited before/around the relevant due dates, which continued to remain available in the ledger.

Questions:

1. Does non-compliance with Rule 86B automatically attract interest under Section 50?
2. Can the 1% be considered "tax remaining unpaid" when the output tax liability was otherwise discharged through eligible ITC?
3. Does the availability of sufficient funds in the Electronic Cash Ledger affect the applicability/calculation of interest?

[Raam Srinivasan Swaminathan Kalpathi]

My replies to your questions:

1. Yes

2. Rule 86B tax due has to be discharged and the excess remittance through the electronic credit ledger can be reavailed as ITC.

3. If there is balance in the cash ledger the question of interest u/s.50 does not arise. There are high court case laws in your favour,

[KASTURI SETHI]

1. Does non-compliance with Rule 86B automatically attract interest under Section 50 ?

Ans. YES

2. Can the 1% be considered "tax remaining unpaid" when the output tax liability was otherwise discharged through eligible ITC ?

Ans. Yes

3. Does the availability of sufficient funds in the Electronic Cash Ledger affect the applicability/calculation of interest ?

Ans. Mere deposit in Electronic Cash Ledger does not amount to payment of tax----------A.P. High Court in the case of Sona Enterprises reported as 2026 (4) TMI 1864 Dated of Order : 27.4.2026

[Sanjeev Agarwal]

1. Rule 86B violation does not automatically trigger Section 50 interest.

Rule 86B restricts utilisation of ITC beyond 99% in specified cases. Section 50 separately requires tax or part thereof to remain unpaid/delayed. Therefore, non-compliance with Rule 86B cannot, by itself, be equated with delayed payment of tax.

2. The 1% need not necessarily be "tax remaining unpaid".

If the taxpayer had eligible ITC sufficient to discharge 100% of the output-tax liability, the tax liability was substantively discharged. The alleged default is in the mode of discharge-100% ITC instead of 99% ITC + 1% cash.

Thus, the Department should establish a statutory basis for treating the 1% as unpaid tax for Section 50 purposes. Rule 86B itself does not automatically deem the 1% to be unpaid tax.

Section 50(3) also should not be mechanically invoked where the ITC was otherwise eligible, since it concerns wrongly availed and utilised ITC.

3. ECL balance is highly relevant.

Where sufficient funds were already credited to the Electronic Cash Ledger on/before the due date and remained available, this materially strengthens the defence against interest. The Arya Cotton Industries line of Gujarat High Court decisions supports the proposition that interest should not accrue merely because the cash-ledger amount was debited later.

However, judicial views on whether mere ECL balance constitutes payment are not uniform; therefore, jurisdiction and the precise ledger chronology matter.

The 10 July 2024 amendment to Rule 88B expressly addresses amounts credited to and remaining in the ECL before the due date. For FY 2022-23, it should not be assumed to apply retrospectively, but it can support the taxpayer's interpretation of the statutory scheme.

Recommended defence

Primary: No Section 50 interest-output tax was fully discharged through eligible ITC; Rule 86B regulates the permitted mode of utilisation and does not automatically establish unpaid tax.

Without prejudice: Even if 1% cash payment was mandatory, amounts already available in the ECL before the due dates materially negate the basis for compensatory interest.

The taxpayer should produce a date-wise ECL reconciliation, challans/CINs, due dates, GSTR-3B dates and subsequent debits, demonstrating that sufficient cash was available and continuously remained in the ledger.

Risk: Rule 86B contravention may be established, but automatic Section 50 interest is reasonably contestable, particularly where the ECL trail is strong.

[Shilpi Jain]

If there is sufficient balance in cash ledger then there is no question of interest

[Sanjeev Agarwal]

However, there is a possible defence even without sufficient ECL, but the best argument is no longer "the Government already had the money"; it is "there was no unpaid output tax-only a breach of the Rule 86B mode-of-payment restriction."

AI Summary

Rule 86B cash-payment restriction raises whether full eligible ITC utilisation creates unpaid tax and Section 50 interest liability.
Rule 86B non-compliance raises whether use of eligible ITC for the entire output tax liability creates unpaid tax for Section 50 interest. One view treats the breach as a mode-of-utilisation restriction rather than delayed tax payment, unless a statutory basis deems the cash portion unpaid. Sufficient Electronic Cash Ledger funds credited before the due date and continuously available may support a defence against compensatory interest, subject to ledger chronology and jurisdictional views. A contrary view distinguishes cash-ledger deposits from actual tax payment and treats the prescribed cash portion as payable.