Optimising Credits In Amended Rules or Input Tax Credit Utilisation

The most effective way to optimise input tax credit utilisation under the amended rules is to ensure that all input tax credits are claimed as soon as possible, as late claims may not be eligible for credit. Additionally, businesses should apply for a refund of any excess input tax credit within the stipulated period and claim a set-off against any tax payable within the time period. Further, businesses should actively monitor their input tax credit balances to ensure they do not exceed the maximum credit limit, as excess credits may be forfeited. Finally, businesses should maintain accurate and up-to-date records of all related transactions in order to facilitate the smooth operation of input tax credit utilisation.

Subsequently, on March 29, 2019, CT notices no. 16/2019 was released, announcing the addition of regulation 88A and the aforementioned new clause.

The utilisation of Input Tax Credits as per Rule 88A:- The consolidated tax must be paid in full before any input tax credit may be used against the integrated tax. Any amount remaining after paying central tax and State tax or Union territory tax may be utilised to pay these other taxes. To the extent that an entity has an available input tax credit on central tax, State tax, or Union territory tax, such credit may be used for the payment of integrated tax, central tax, State tax, or Union territory tax, as applicable.

With the release of Circular No. 98/17/2019 on April 23, 2019, it has been made clear that Section 49 of the CGST Act stipulates that the integrated tax credit must be used to pay integrated tax, then Central tax, and finally, State tax.

This resulted in a scenario where a taxpayer would have to pay his tax bill for one form of tax (let’s say State tax) via the electronic credit ledger while his input tax credit for another type of tax (let’s say Central tax) was sitting unused in the electronic credit ledger.

Rule 88A of the CGST Rules allows a taxpayer to utilise an input tax credit of integrated tax to pay Central tax, State tax, or Union Territory tax in any order, as long as the integrated tax credit is used up first.

Under the new regulations, Input Tax Credits (ITCs) for CGST and SGST may only be used after all IGST in the electronic credit ledger has been used. ITC of IGST may be used to CGST or SGST output in any proportion and any order after being used to offset IGST output.

Examples of the GST Offset Provision

Let’s look at two examples to illustrate how we should talk about applying provisions.

Example 1: To understand the order of IGST credit set-off

When using IGST credit, a little shift in the procedure is required. Let’s look at an example to get a feel for the context of the kickoff. Let’s assume Mr X’s GST obligations and inputs are as follows.

The current system triggers the event by doing the following:

The CGST or SGST due must be settled first with the corresponding tax credit.

However, the IGST credit that is now available must be set off per the new set-off method, and there are three ways in which this may be accomplished:

In Case 1, all unused IGST credit is transferred to CGST.

Case 2: Apply for any unused IGST credit in full against the SGST

Case 3: Partially offsetting CGST and SGST obligations with unused IGST credits

*Note: In this example, we only considered three possible outcomes, but the legislation does not mandate a hard and fast procedure for using unused IGST credits toward CGST or SGST obligations.

Any combination of CGST and SGST credit may be used, but the taxpayer must first entirely exhaust the IGST credit. As seen from the illustration, the new method of set-off requires that IGST credits be used first, followed by CGST and then SGST/UTGST. Case 3 is the optimal plan for making the most of available credit.

Impact on Business

Now, let’s discuss how this affects your company. According to the revised GST offset regulations, IGST input credit must be used up entirely before CGST or SGST input credits may be used.

In Example 2, the taxpayer’s credit is greater because of purchases made across state lines than because of purchases made inside the same state. As a result, more business is conducted inside the state than outside it. More input credit for the IGST is built up as a result. Consequently, inefficient use of this resource might impede the company’s ability to generate income.

The taxpayer is delaying using the accumulated CGST or SGST credits (as the case may be) across many tax periods if they choose either of the two scenarios shown in Illustration II. Access to working cash is required as a consequence.

The taxpayer may also carry over any unused CGST or SGST credit later when his interstate sales (IGST liabilities) exceed his intrastate sales.

Case 3 is the best option since it allows the taxpayer to avoid tax payments and the subsequent blocking of working capital by using the available credit in an equal proportion of CGST and SGST. The Administration, however, sees the new provision as an urgent step to facilitate the orderly transfer of IGST funds.