To optimise the utilisation of input tax credit under the new rules, it is essential to claim all input tax credits as soon as possible. Late claims may be ineligible for credit. Businesses can apply for a refund of any excess input tax credit within the specified period and use it to offset any tax payable within the same period. 

Additionally, it is important for businesses to track their ITC balances to ensure that they don’t exceed the maximum credit limit. It is advisable for businesses to maintain accurate and updated records of all transactions related to ITC utilisation to ensure smooth operations. 

Two new subsections were added to the CGST Act:

Section 49A: The Input Tax Credits for central tax, state tax, or union territory tax must be kept until all input tax credits for integrated tax have been applied before being applied towards payment of integrated tax, central tax, state tax, or union territory tax. This is regardless of anything stated in Section 49.

Section 49B: The input tax credit for integrated tax, central tax, state tax, or union territory tax may be used to pay any such tax. Regardless of anything in the chapter, the administration may prescribe the order and method of doing so based on the council’s suggestions.

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 to pay 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.

How Much May Input Tax Credit (ITC) be Used to Offset GST?

As at the beginning of the 2021 tax year, some taxpayers could not use the ITC balance in their electronic credit ledger to pay off more than 99% of their tax bill for that time. At least 1% of tax obligations must be paid in hard currency.

• A taxpayer who has filed late income tax returns over the last two years and paid more than Rs.1 lakh in income tax collections for himself, his proprietor, any two partners, his managing director, trustee, board, etc.
• Someone who has a GST input tax credit refund of more than Rs.1 lakh due to an inverted tax structure or zero-rated supply without tax payment.
• For all tax periods in the current FY, a registered taxpayer has solely paid over 1% of his GST due using his electronic cash ledger.

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.

Type of GST	Output Liability	Input Tax Credit
IGST	500	2000
CGST	1000	150
SGST/ UTGST	1000	150
Total	2000	2300

The current system triggers the event by doing the following:

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	2000	500  (from IGST)	–	–
CGST	1000	150	150 (from CGST) 850 (from IGST)	–	–
SGST/ UTGST	1000	150	150 (from SGST) 650 (from IGST)	200	–

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.

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	2000	500  (from IGST)	–	–
CGST	1000	150	1000* (from IGST)	–	150
SGST/ UTGST	1000	150	500 (from IGST) 150 (from SGST)	350	–

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

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	2000	500  (from IGST)	–	–
CGST	1000	150	500 (from IGST) 150 (from CGST)	350	–
SGST/ UTGST	1000	150	1000* (from IGST)	–	150

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

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	2000	500  (from IGST)	–	–
CGST	1000	150	750* (from IGST) 150 (from CGST)	100	–
SGST/ UTGST	1000	150	750* (from IGST) 150 (from SGST)	100	–

*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.

Example 2: Analyzing the Effects of the New Rule on Business

In the first example, we saw that the total GST output obligation was more than the total GST input; in this second illustration, we’ll see the opposite. Let’s assume Mr X has the following responsibility and input credit for a given tax period:

Type of GST	Output Liability	Input Tax Credit
IGST	500	1000
CGST	500	300
SGST/ UTGST	500	300
Total	1500	1600

Here are three cases of how the IGST’s ITC may be used.

Case 1: Credit for unused IGST will be applied to the CGST owed.

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	1000	500  (from IGST)	–	–
CGST	500	300	150 (from CGST) 850 (from IGST)	–	–
SGST/ UTGST	500	300	150 (from SGST) 650 (from IGST)	200	–

Case 2: Transfer of all unused IGST credit to the SGST

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	1000	500  (from IGST)	–	–
CGST	500	300	300(from CGST)	200	–
SGST/ UTGST	500	300	500* (from IGST)	–	300

Case 3:  Liability for CGST and SGST may be reduced by an equivalent amount using any unused IGST credit.

Type of Tax	Liability	Credit Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	500	1000	500  (from IGST)	–	–
CGST	500	300	250*(from IGST) 250(from CGST)	–	50
SGST/ UTGST	500	300	250*(from IGST) 250(from SGST)	–	50

*Note: We limited ourselves to only three examples where the legislation does not mandate a particular method for allocating unused IGST credits between CGST and SGST obligations.

A taxpayer may use any combination of CGST and SGST credits only after the IGST credit has been fully explored. In the first two, the taxpayer owes both CGST and SGST, whereas in the third, a credit for either CGST or SGST is past due and recorded in the Electronic Credit Ledger (ECL).

If the taxpayer opts for Scenario 3, he will not be required to make a cash payment of either CGST or SGST liability. Although the buy and sales pattern may change from interstate to intrastate or vice versa, he will be allowed to carry forward the same amount of CGST and SGST in ECL, allowing him to make the most of his credits in the following months. This safety measure must be monitored carefully.

Updates on GST Portal

From July 2019, the site will provide validated data that conforms to the new rules.

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 income generation.

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.

Conclusion

Input tax credit may be manually deducted from output tax obligations using the GST system. Taxpayers must allocate their credits wisely at the end of each tax period to get the most out of their ITC. When optimised, the new offsetting method does not affect working capital needs beyond those of the previous technique.

In addition, it is essential to maintain a balance and keep the same number of credits in both the CGST and the SGST/UTGST ledgers to make the most of future credits. After satisfying the IGST obligation using the IGST credits, this may be done quickly. It would help if you used any unused IGST credits toward CGST or SGST in a ratio of 1 to 1. It would be best if you used any unused IGST credits toward CGST or SGST in a ratio of 1 to 1. Next month, the companies that have yet to do it in the previous two will finally get around to it. If there is an excess of ITC available, they may optimise it such that the CGST credit ledger balances out with the SGST credit ledger.