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How to Manage Unutilised Input Tax Credit Resulting from Rate Changes?

Updated on :  

08 min read.

The reduction in Goods and Services Tax (GST) rates is a welcome move for the consumers and businesses, as a decrease in GST rates essentially implies that the businesses availing of the Input Tax Credit (ITC) would exceed their tax liability.

For instance, let’s assume goods were bought by a trader when the GST rate was 28% on the said goods at the time of purchase, but subsequently, the GST rate on the said goods dropped to 18% when the trader sold that goods. Assuming that the buying and selling prices remained constant, it effectively means that the trader availed ITC of 28% to offset a tax liability of 18% and hence has a utilised credit of 10% left.

What will happen to the unutilised ITC left with the trader? Will this stay unutilised in the credit ledger blocking the trader’s capital? Or it could be utilised for offsetting the trader’s tax liabilities? The answer is – yes, that trader has two options to use its unutilised ITC.

Option 1: Using the unutilised ITC to set off the tax liability

To understand it better, let us assume that a trader has bought product X worth INR 10,000 at 28% GST and has sold the product after the rate was reduced to 18%, after keeping a profit of 10%. We can calculate the ITC left unutilised with the trader using the details.

In the scenario where the rates have been reduced, the trader would have to pay less GST, compared to the input tax availed.

Now, let’s assume the same trader is dealing with another product B as well, for which the GST hasn’t been reduced. Let’s assume the trader bought this product Y for INR 10,000 at 18% GST and sells it after keeping a profit of 10%. Using the details above, we can calculate the GST payable by the trader.

ParticularsAmount

Cost of Product X
INR 10,000

Input tax @ 28%                                                    A

INR 2,800

Sale Amount @ 10% Profit

INR 11,000

Output tax @18%                                                  B

INR 1,980

Unutilised ITC                                                   A – B

INR 820

If the rates haven’t been reduced, the trader would have to pay more GST than the input tax.

Now, when the trader files the GST returns for that particular month, the unutilised input tax credit coming from sales of Product X, i.e., INR 820, could be used to offset the tax liability resulting from the sale of the product Y, i.e., INR 180. It is obvious that the more the value of product Y, the more would be the trader’s tax liability. At some point, the unutilised input tax credit resulting from the sale of product Y could be fully utilised.

ParticularsAmount

Cost of Product X
INR 10,000

Input tax @ 18%                                                    A

INR 1,800

Sale Amount @ 10% Profit

INR 11,000

Output tax @18%                                                  B

INR 1,980

Unutilised ITC                                                   A – B

INR 180

Option 2: Refund of Unutilised ITC

According to the GST law, a taxpayer can claim a refund of the unutilised ITC at the close of the relevant period. ITC reversal would be granted in cases where the ITC accumulation has taken place due to an inverted duty structure – wherein the GST inputs are higher than output supplies. However, it is important to note that there are few notified supplies where ITC reversal isn’t allowed. 

The timeline for processing the refund claims is 60 days, and if these aren’t settled within the specified time, the refund would be paid together with an interest rate of 6%. Furthermore, 90% of these claims will be paid within seven days of claim acknowledgement on a provisional basis. Also, these claims require minimum documentation, and the refund would be credited directly to the trader’s bank account. The entire process is online, making it hassle-free for the taxpayers.

To conclude, businesses don’t have to worry about their unutilised ITC. Even if a business cannot offset its ITC entirely against the tax liability from sales of other goods, GST law has detailed provisions wherein the refund of unutilised ITC can be claimed.