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Just when we thought that we have understood the GST system with regard to the Input Tax Credit Utilisation, the Government has now changed the procedure for the order of set-off of the same. While the new rules are fairly simple, let us walk you through this new change and find out how exactly it will impact your business.

 

New law on GST set-off

 

Firstly, to take into consideration the new sections inserted after section 49 of the CGST Act-

 

“49A. Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully towards such payment.

 

49B. Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub-section (5) of section 49, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax.”.

 

So on a reading of the above, the order of set-off of Input Tax Credit will now start with Integrated Tax credit over the Central Tax credit or the State Tax credit, or Union Territory Tax credit, as the case may be. Unless and until Integrated Tax credit has been completely utilized, one cannot use the other credits available.

 

Comparing Old & New Law on GST set-off

 

The Table below highlights the differences between the old system and the new system of set-off of Input Tax credit-

 

As per the existing set off the following rules apply –

Payment for First set off from Then set off from
SGST SGST IGST
CGST CGST IGST
IGST IGST CGST and SGST

 

As per rules effective 1st February 2019, the following rules will apply for any tax payments made –

Payment for First set off Then set off
SGST IGST SGST
CGST IGST CGST
IGST IGST CGST and SGST

 

 

Illustration for Input tax credit utilisation

To understand the set-off from a practical perspective, let us take for example Mr.X has an IGST liability of Rs.50 lakhs, a CGST liability of Rs.1 Cr and his SGST liability of Rs. 1Cr

His Input Tax credit is as follows – IGST credit of Rs.2 Cr, CGST credit of Rs. 15L and SGST credit of Rs. 15L.

 

As per the existing system, the set-off takes place as follows-(all figures in INR)

 

Type of Tax Liability Credit Available Set-off of Liability Balance to be paid in cash Balance credit available
IGST 50,00,000 2,00,00,000 50,00,000 (from IGST)
CGST 1,00,00,000 15,00,000 15,00,000

(from CGST)

Rs.85,00,000 (from IGST)

SGST/UTGST 1,00,00,000 15,00,000 Rs. 15,00,000 (from SGST)

Rs.65,00,000

(from IGST)

20,00,000

 

You can see that CGST or SGST payable needs to be paid first with CGST credit or SGST credit respectively.

 

However, as per the new procedure of set-off, the IGST credit available will need to be set-off first and in this order-(all figures in INR)

 

Type of Tax Liability Credit Available Set-off of Liability Balance to be paid in cash Balance credit available
IGST 50,00,000 2,00,00,000 50,00,000 (from IGST)
CGST 1,00,00,000 15,00,000 1,00,00,000 (from IGST) 15,00,000
SGST/UTGST 1,00,00,000 15,00,000 Rs.50,00,000

(from IGST)

15,00,000 (from SGST)

35,00,000

 

So as you can see in the example, IGST credit has been utilized first as per the new system of set-off, only after which, can CGST or SGST/UTGST be set-off.

 

Impact on Business

Let us discuss how exactly does this impact your business-

 

You see from the second table that in the case of CGST, even though the credit was available and could have been utilized fully, the new system will not let you use the same for the set-off. Since CGST credit was not utilized at all, this put an additional burden on the amount of SGST to be paid, as CGST credit cannot be utilized to pay SGST. Further, we can notice that there can arise a possibility of a carry forward of input tax credits of SGST or CGST remaining unutilised during the tax period.

 

So this affects the working capital of your business as your cash outflow will increase from month to month due to the new rules of set-off.

 

However, from the Government’s point of view, it is immediate revenue coming in, in the form of cash. Thus, it helps in mobilizing the economy.

 

Updates on GST Portal

The validations based on the changes in the rule, is yet to be incorporated on the GST Portal login for GSTR-3B as on 8th Feb 2019.

 

There was never a manual intervention involved to Offset liabilities with the Input tax credit amounts. This means that the system automatically sets off the credits with liabilities. This is based on the current GST rule for set off following the optimum utilisation. Hence, taxpayers can be relieved.

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