CHANGE IN INPUT TAX CREDIT ENTITLEMENT UNDER GST

[Dr. Sanjiv Agarwal]

GST laws have been amended w.e.f. 01.02.2019 which inter alia includes amendment in manner of taking input tax credit amongst three formats of GST vis IGST, CGST and SGST. This has resulted in undue hardship to many taxpayers across the country.

Goods and services tax involves two equal components on any transaction, CGST and SGST / UTGST. Inter-state supplies attract integrated goods and services tax (IGST), which is eventually apportioned between the Union and state Governments.

Law Prior to 1^st February, 2019

Section 49 of the CGST Act, 2017 contains provisions in relation to payment of tax, interest, penalty and other amounts.  Sub-section 5 in relation to input tax credit states as under:

The amount of input tax credit available in the electronic credit ledger of the registered person on account of––

1. integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;
2. the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;
3.  the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax;
4. the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax;
5.  the central tax shall not be utilised towards payment of State tax or Unionterritory tax; and
6. the State tax or Union territory tax shall not be utilised towards payment ofcentral tax.

Section 49 (5) of CGST Act, 2017 provided manner of utilizing Input Tax Credit (ITC) for payment of GST output tax liability, e.g IGST can be set off against IGST and then CGST and SGST, CGST can be set off against CGST and then against IGST, and SGST can be set off against SGST and then against IGST.

The Government has amended CGST Act, 2017 vide CGST Amendment Act, 2018 with various changes w.e.f 01.02.2019 and one of the important amendment was made in Section 49 of CGST Act by introducing new section 49A to the CGST Act, 2017.

Accordingly, the balance in credit ledger can be used only for making the payment of tax as CGST, SGST or IGST. Besides, the balance in such ledger will get reduced by amount of refund in case sought under the provisions of the Act.

The credit ledger shows the balance of credit lying in CGST, SGST or IGST. The amount under various heads of credit could be used in the following order of preference:

1. IGST can be used:
   1. For payment of tax as IGST
   2. For payment of tax as CGST
   3. For payment of tax as SGST

2. CGST can be used:
   1. For payment of tax as CGST
   2. For payment of tax as IGST, in case balance is available

3. SGST can be used:
   1. For payment of tax as SGST
   2. In case balance available, payment of tax as IGST

The following matrix depicts the manner of availing input tax credit prior to 1^st February, 2019, i.e. upto 31.01.2019:

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

New provisions w.e.f. 01.02.2019

CGST (Amendment) Act, 2018 has inserted following new sections in the GST law w.e.f. 01.02.2019. Similar amendments have been made in other Acts for IGST, SGST etc.

The relevant extract of the new provision are reproduced here under:

49A. Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized 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 utilized fully towards such payment.

49B. The Government may, on the recommendations of the Council, prescribe the order and manner of utilization 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

Accordingly, Government has changed the order of setoff of input tax credit by introducing section 49A w.e.f. 01.02.2019 according to which, IGST Credit shall be set off fully before taking any setoff of CGST or SGST, which means earlier CGST/SGST ITC was used to set-off CGST /SGST liability, as the case may be, but now IGST Credit has to be first utilized fully for payment of IGST then for CGST and then for SGST liability as the case may be, even before utilization of ITC of CGST or SGST.

The following matrix explains the manner of credit w.e.f. 01.02.2019 for any tax payments to be made:

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

Change and impact

The new amendment in the manner of taking audit will impact the working of taxpayers so much so that there will be less amount of total credit available to a taxpayer in a given period as compared to pre-amendment period. It will create paradox where on one hand taxpayers have credit available in any of the three formats of tax (IGST / CGST / SGST) but on the other hand, they are made liable to discharge GST liability in cash.  This adverse impact is illustrated by way of the following example.

Example:

Let us suppose the following figures for filing the GSTR-3B:

(INR)

	Tax Liability	Input Tax Credit
IGST	100	200
SGST	100	50
CGST	100	50

Till 31.01.2019, the ITC was taken as follows: 

(INR)

	ITC Available	IGST	CGST	SGST	To be paid by Cash Ledger
	Tax liability	(200)	(50)	(50)
IGST	100	100	-	-	-
CGST	100	50	50	-	-
SGST	100	50	-	50	-

The Input tax credit shall be availed w.e.f. 01.02.2019 as follows:

(INR)

	ITC Available	IGST	CGST	SGST	To be paid by Cash Ledger
	Tax liability	(200)	(50)	(50)
IGST	100	100	-	-	-
CGST	100	100	-	-	-
SGST	100	-	-	50	50
ITC Balance		-	50	-	-

As can be seen, that the amount is not different in both the cases. But the tax of the SGST should be paid from the cash ledger even when there is credit in the CGST head. ₹ 50 is to paid in cash.

Thus, IGST credit is to be used against IGST and also IGST first need to be set off against CGST and then only CGST credit can be set off against CGST.  Also, the ITC of CGST can’t be utilized against the SGST or vice-versa.

One of the major positive impact for the states and revenue (and adverse for assesses) of the change in matrix for claiming input tax credit w.e.f. 1^st February, 2019 will be that it will force the taxpayers to pay IGST out of pocket inspite of there being unutilized credit of CGST or SGST or UTGST lying in their electronic credit ledger. They cant use such input tax credit unless the IGST has been fully exhausted.

Not only this, another major concern arising out of this amendment is that it restricts the seamless flow of ITC to the taxpayer across the board which will also impact the working capital requirements as well as increase the cost of funds to the taxpayers. All this would happen for no logical fault of taxpayers but merely because of an anomaly in the prescribed manner of taking credit needless to say the earlier manner was logical, tax friendly and ensured the seamless credit which is the primary objective of GST law.

The aforementioned amendment results into undue hardship to the assessees as it shifts the manner of taking credit giving first preference to IGST which was not the case prior to 01.02.2019. The  main reason for this is the fact that while taxpayers are located across the country, manufacturers are few in numbers and are located in very few states.  

The new provisions restrict using credits for central and state components of the goods and service tax (CGST and SGST) unless credits for taxes paid on inter-state transactions are fully used. The amendment prescribes the order in which credits for past payment of various components of goods and services tax can be adjusted against the tax liability on the final output of a business.

This, in many cases would lead  to a situation where the more flexible integrated goods and services credit is used up for paying CGST liability fully, forcing businesses to pay  fully or partly SGST liability in cash, thus taking away the flexibility in utilization of tax credits. Unlike credits for integrated goods and services, the same for CGST and SGST can’t be cross-utilized. This result in tax payment in cash while tax credits remain on the books of the company.