Order of utilisation of input tax credit - Huge balances in the CGST credit ledger

[Shilpi Jain]

The Government’s slogan for the implementation of GST has always been ‘One Nation One Tax’, though none of the stakeholders have ever been able to relate GST to this slogan for the reason that GST has continued (as in the earlier regime of indirect taxes) to levy

1. A Centre’s Tax i.e. IGST
2. State Taxes i.e. each State having its own SGST like TNGST, MGST, etc.
3. Central Taxes i.e. each State having its own CGST (depicted by the fact that the CGST of one State is not available for utilisation against the CGST liability of any other State – at least as per the portal law)

The reason behind the multiplicity of the taxes is the federal structure in India and the fact that the Government wants the taxpayers themselves to work out the basic revenue apportionment to each of the States so that the segregation of the States’ revenue becomes easier for the Centre.

In this perspective, the Indian GST law has provisions relating to the determination of place of supply (PoS). This identifies the State that gets the revenue relating to tax paid by the tax payer on his output supplies i.e. if any tax is paid with the PoS as Telangana, such tax would accrue to the State of Telangana and subsequent apportionments are made to identify the Centre’s share.

However, the Government has noted that there is a huge amount of input tax that is lying under the IGST account, unutilised, and the Government is helpless to identify the State to which such revenue should accrue to, at the end of a particular financial year. In this background certain amendments were made to the input tax credit utilisation order under GST, which is summarised in this article.

However, there have been a couple of amendments in this regard and we have noted that many of the taxpayers are aware of only one of such amendment, leading to a huge accumulation of credit in the CGST credit ledger whereby they are left to pay the taxes in cash even when huge credit balances are lying in the CGST credit account.

The general rule for set off of credit prior to 1^st Feb ‘19 as per section 49(5), is as below

• IGST input is to be first utilized towards the payment of IGST liability and any remaining balance of this credit can be utilized for payment of CGST & then for S/UTGST liability.

• The CGST input is to be first utilized towards the payment of CGST liability and any remaining balance of this credit can be utilized for payment of IGST liability.

• The S/UTGST credit is to be first utilized towards the payment of S/UTGST liability and any remaining balance of this credit can be utilized for payment of IGST liability.

• The State tax or Union Territory tax shall not be utilized towards the payment of central tax and vice-versa.

This can be depicted as per the table below:

Table 1

Sequence	Input tax credit	To be set off against
		IGST liability	CGST liability	S/UTGST liability
None	IGST	1st	2nd	3rd
None	CGST	2nd	1st	Not permitted
None	S/UTGST	2nd	Not permitted	1st

In the above mechanism, there was no sequence prescribed for the order in which the credits should be used i.e. a taxpayer could use CGST and SGST credit first and then use IGST credit, which was the most preferred credit as it can be used to set off any liability. This led to huge accumulation of credit in the IGST account which the Government was not able to allocate to any specific State easily.

This led to the change in the credit utilisation mechanism as below (in addition to the condition set out in Table 1 above) from 1^st Feb ’19 to 31^st Mar ‘19 as per section 49A and section 49B:

• IGST credit has to be exhausted first against IGST liability and then against CGST liability and only after that towards the SGST liability.

This is depicted in the table below:

Table 2

Sequence	Input tax credit	To be set off against
		IGST liability	CGST liability	S/UTGST liability
1	IGST	1st	2nd	3rd
2	CGST	2nd	1st	Not permitted
2	S/UTGST	2nd	Not permitted	1st

From the above table it can be seen that it was made mandatory to first exhaust the IGST credit before setting out to use the CGST and SGST credits. This amendment led to a lot of representations being made by the trade and industry for the reason that the utilisation of IGST credit for CGST liability before being used for SGST liability led to a huge accumulation of the CGST credit and thus becoming a cost.

Hence there was another provision that changed the credit utilisation mechanism (from 1^st Apr ‘19 as per rule 88A)

IGST credit after utilisation against IGST liability can be used in any order and for any amount against CGST or UT/SGST liability.

This is depicted in the below table

Table 3

Sequence	Input tax credit	To be set off against
		IGST liability	CGST liability	S/UTGST liability
1	IGST	1st	2nd	2nd
2	CGST	2nd	1st	Not permitted
2	S/UTGST	2nd	Not permitted	1st

The above does not create hardship for the taxpayers as he is now free to use the IGST credit for either SGST or CGST liability in any order and for any amount. However it has been noted that while filing Form GSTR-3B the GST portal gives suggestion for the set off of the credits as depicted in Table 2 above. If taxpayers, unaware of the situation in Table 3, accept such suggestion they are left with huge CGST credit without a solution for its utilisation.

The taxpayers should be aware that the suggested utilisation of ITC set – off can be edited by him to the extent it is as per law. Hence, the taxpayer can edit the suggestion given by the portal and use the credit as per the mechanism depicted in Table 3 above.

Let us take an example to understand the current provision in place and how one can alter the suggested utilization pattern in the portal to one’s advantage in order to free the working capital.

Available Credit		Liability
IGST	50/-	IGST	10/-
CGST	30/-	CGST	50/-
SGST	30/-	SGST	50/-

It can be seen that the portal’s suggestion would be as per table 2 i.e. the ₹ 40 IGST credit remaining after paying off the IGST liabilty is used fully for CGST liability. This will lead to paying ₹ 20/- in cash for the SGST liability even if there is credit balance lying in CGST.

By changing the utilisation as per Table 3 i.e. IGST credit of ₹ 40 remaining after setting off IGST liability should be used equally for CGST and SGST liability, the taxpayer can utilize the credit balance effectively and ensure minimal cash outflow-

GST Portal

The above indicates that:

• The portal auto calculates and makes suggestions to utilize the credits. The credits can further be changed to desired pattern of utilization.
• The portal might show a pop of red when the changes are made, but one can proceed with the desired changes, if the same is as per the provisions of law.

Thus, in case any taxpayer is left with huge CGST balance due to following the mechanism set out in Table 2 above the following can be a way out to ensure that the balance in the CGST ledger is reduced and there is no un-necessary cash outflow for the payment of taxes when there are credit balances available:

• Future IGST credits should be first utilised against SGST liability and only then used for any CGST liabilities. This can be continued until the balances in CGST credit ledger match that of the SGST credit ledger.
• IGST liability can be set off first by using the CGST credits (After setting off IGST credit)
• In case there are challans paid in CGST tax, it can be transferred to SGST or IGST as required (by use of form PMT-09) and then IGST credit be utilised for payment of SGST liability

Once the huge balances in CGST credit ledger is normalised, it would be advised to retain equal amount of credit in CGST and S/UTGST credit ledgers. This can be done by utilizing IGST credit for IGST liability and the residual credit balance in IGST can be used for CGST and S/UTGST equally.

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For any inputs/feedback please write to [email protected]

CA Shilpi Jain

Aporna Das Gupta

Discussions to this article

[niranjan gupta]

"The Government’s slogan for the implementation of GST has always been ‘One Nation One Tax’, though none of the stakeholders have ever been able to relate GST to this slogan for the reason that GST has continued (as in the earlier regime of indirect taxes) to levy"

According to my understanding "ONE NATION ONE TAX" means one rate of tax on a commodity/service through out India.