Order of setting-off ITC with output tax liability
This is to highlight the recent changes in the Central Goods and Services Tax Act, 2017 (‘CGST Act’) in respect of order of setting-off of input tax credit (ITC) with output tax liability.
Legislative changes
Change made in Section 49 of the CGST Act
The excess credit of IGST shall first be utilised for payment of CGST and thereafter for payment of SGST.
Insertion of Section 49A under the CGST Act
This section overrides Section 49 and provides that credit of IGST shall be utilised fully before utilising credit of CGST or SGST. In other words, credit of CGST and SGST cannot be used to discharge their respective liability till the credit of IGST is fully utilized.
Insertion of Section 49B of the CGST Act
This section overrides the entire Chapter X dealing with payment of tax and empowers the Government to prescribe Rules for utilization of credit. If any Rules are prescribed (which has not yet been done), such Rules will override the provisions of Section 49 and 49A of the CGST Act.
The above amendments are effective from February 1, 2019. The effect of these changes is summarized as under:
|
Nature of tax on input side |
Order of utilization of credit on output side (before amendment) |
Order of utilization of credit on output side (post amendment) |
||||
|
First |
Second |
Third |
First |
Second |
Third |
|
|
IGST |
IGST |
CGST |
SGST |
IGST |
CGST |
SGST |
|
CGST |
CGST |
IGST |
– |
IGST |
CGST |
– |
|
SGST |
SGST |
IGST |
– |
IGST |
SGST |
– |
NITYA Comments:
These amendments were aimed at minimising fund settlement amongst the Central and State Governments on account of IGST. However, the amendment has created an anomaly wherein credit of CGST will get accumulated and SGST will have to be paid in cash in certain cases. The same is illustrated below:
|
Particulars |
Order of utilization of credit on output side (before amendment) |
Order of utilization of credit on output side (post amendment) |
||||||
|
Taxable Amount |
IGST |
CGST |
SGST |
Taxable Amount |
IGST |
CGST |
SGST |
|
|
Purchases |
1,00,000 |
12,000 |
3,000 |
3,000 |
1,00,000 |
12,000 |
3,000 |
3,000 |
|
Sales (A) |
1,20,000 |
3,600 |
9,000 |
9,000 |
1,20,000 |
3,600 |
9,000 |
9,000 |
|
Paid via CGST / SGST credit (B) |
– |
– |
3,000 |
3,000 |
– |
– |
600 |
3,000 |
|
Paid via IGST credit (C) |
– |
3,600 |
6,000 |
2,400 |
– |
3,600 |
8,400 |
|
|
Balance to be paid in cash (D) = (A) – [(B) + (C)] |
– |
– |
Nil |
3,600 |
– |
– |
– |
6,000 |
|
Balance left in credit ledger |
– |
Nil |
Nil |
Nil |
– |
Nil |
2,400 |
– |
The above amendment will have significant working capital impact for the taxpayers having:
- High inter-state procurements, with combined credit of IGST and CGST exceeding total liability of IGST and CGST; and
- Some local procurements.
Such taxpayers will include wholesale or retail dealers as well as depots of companies having majority procurements in the form of inter-state purchases, imports or inward stock-transfer of goods and primarily local supply.
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