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Changes in Utilization of Input Tax Credit under the GST Act

Narendra Kumar

| Updated: May 04, 2019 | Category: GST

Input Tax Credit under the GST

Utilization of Input Tax Credit simply means availing the Input of IGST, CGST and SGST/UTGST accumulated on account of “Input goods and services”  for payment of Output Tax Liability which arises on account of Supply of Goods and Services. Recently there have been made changes w.e.f 01.02.2019 on utilization of Input Tax Credit of IGST, CGST and SGST/UTGST to minimize fund settlement on account of IGST. Pre and Post change scenarios have been explained below and also the clarification dated 23.04.2019 have also been explained for ease of understanding.

Pre Amendment Scenario

Section 49 of the CGST Act provides for the manner of utilization of the Input tax credit.

The order of Input tax credit (ITC) set-off provided under the existing law can be summarized as under:

  • Transactions within the state (Intra-State Transactions):

CGST- credit of CGST is to be utilized subsequently for :

a. CGST

b. IGST

SGST/UTGST- credit of SGST/UTGST is to be utilized subsequently for :

a. SGST/UTGST

b. IGST

  • Transactions outside the state (Inter State transactions):

IGST- credit of IGST is to be utilized subsequently for :

IGST

CGST

SGST/UTGST

Cross utilization of CGST and SGST/UTGST is not permissible.

However, various representations have been received from the trade taxpayers, regarding the issue of

Utilization of input tax credit of IGST in a particular order. This has resulted in accumulation of input tax credit for one kind of tax in the electronic credit ledger and discharge the liability of other kind of tax in the electronic cash ledger. This means that in spite of having a certain amount of ITC available to the taxpayer, he still needs to pay the GST amount from his pocket as the available ITC is not the same kind of tax.

Post Amendment Scenario ( w.e.f 01.02.2019 )

 Clauses (c) and (d) of Section 49(5) of the CGST Act are amended vide the CGST Amendment Act, 2018 with effect from 1st February, 2019. The amendment provides that the credit of SGST/UTGST can be utilized for the payment of IGST only when the balance of the input tax credit on account of CGST is not available for the payment of IGST.

Further, new sub-sections 49A and 49B are also inserted, also with effect from 1st February, 2019 vide the CGST Amendment Act, 2018 which provides that the taxpayer should utilize the credit of IGST completely before any ITC of CGST or SGST/UTGST can be utilized to discharge any tax liability. Also, credit of IGST has to be utilized first for the payment of IGST, then CGST and SGST in that order compulsorily.

This purpose of this change is to minimize the funds settlement on account of IGST.

Therefore, the manner of utilization of IGST credits post effective date of amendments is as follows:

  • Credit of IGST to be utilized first for liability of : IGST→CGST→SGST THEN
  • Credit of CGST to be utilized first for the liability of : CGST/IGST ( If any )
  • Credit of SGST to be utilized first for the liability of : SGST/IGST ( If any )
  • Credit of UTGST to be utilized first for the liability of: UTGST/IGST ( If any).

Recent Change Made –Circular Dated 23.04.2019

After the amendment, in certain cases, where a person has to discharge his tax liability on account of single type of tax (say SGST) through electronic cash ledger, while the input tax credit on account of other type of tax(say CGST) remains un-utilized in the electronic credit ledger.

To overcome this issue, a circular dated 23.04.2019 is issued (Circular No. 98/17/2019-GST) in which a newly inserted rule 88A in the CGST rules allow utilization of input tax credit of IGST towards payment of CGST and SGST/UTGST, in any order, subject to the condition that the entire input tax credit on account of IGST is completely exhausted first before the input tax credit of CGST, or SGST, or UTGST can be utilized. It is clarified after the insertion of the said rule, the order of utilization of input tax credit will be as per the order mentioned below:

Therefore, the manner of utilization of IGST credits post effective date of amendments is as follows:

  • Credit of IGST to be utilized first for liability of : IGST→CGST, SGST, UTGST(in any manner and in any proportion)
  • Credit of CGST to be utilized first for the liability of : CGST/IGST ( If any )
  • Credit of SGST to be utilized first for the liability of : SGST/IGST ( If any )
  • Credit of UTGST to be utilized first for the liability of : UTGST/IGST ( If any )

The rule has been explained below through an illustration:

Amount of Input Tax credit and Output tax liability under different tax heads:

Tax Type Input Tax Credit Output tax Liability
IGST 2600 2000
CGST 400 600
SGST/UTGST 400 600
Total 3400 3200

Option 1:

Input tax credit on account of Discharge of output liability on account of IGST Discharge of output tax liability on account of CGST Discharge of output tax liability on account of SGST/UTGST Balance of Input tax credit
IGST 2000 400 200 0
Input tax credit on account of IGST has been completely exhausted
CGST 0 200 200
SGST/UTGST 0 400 0
Total 2000 600 600 200

 Option 2:

Input tax credit on account of Discharge of output liability on account of IGST Discharge of output tax liability on account of CGST Discharge of output tax liability on account of SGST/UTGST Balance of Input tax credit
IGST 2000 200 400 0
Input tax credit on account of IGST has been completely exhausted
CGST 0 400 0
SGST/UTGST 0 200 200
Total 2000 600 600 200

Conclusion

Since the common portal is not updated with the changes made, presently it supports the order of utilization of ITC in accordance with the provisions before the amendment was made. Therefore till new changes are made on the common portal, taxpayers may continue to utilize their ITC as per existing provisions.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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