Utilization of ITC: Practical Scenarios
The CGST (Amendment) Act, 2018 has amended section 49(5) and inserted Section 49A and 49B which has drastically rationalised the utilization of ITC. This article is discusses the practical aspects on the new scheme of utilization of credit in the light of recent notification 16/2019 and CBIC Circular 98/17/2019.
Background
One of the fundamental feature of GST is that availment of ITC has been simplified to avoid cascading effect which were existing in the earlier regime. The Dual GST Model provided for three different taxes namely IGST, CGST and SGST/UTGST. Therefore a mechanism for set-off of the credits necessary for effective payment of taxes. Section 49 of the CGST Act provides for the payment of taxes, interest, penalty and other amount. Subsection (5) of Section 49 deals with the order of utilizing ITC for payment of GST liability, which reads as follows:
The amount of input tax credit available in the electronic credit ledger of the registered person on account of––
(a) 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;
(b) 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;
(c) 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;
(d) 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;
(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and
(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.”
Section 49A
The CGST (Amendement) Act, 2018 introduced new section 49A and 49B w.e.f 1st February 2019. The section 49A starts with “Notwithstanding anything contained in section 49”, it means Section 49A override entire section 49 to the extent it contradicts section 49A. Section 49A provides that ITC of CGST and SGST shall be utilised only after the ITC of IGST has been first utilised fully toward payment of IGST, CGST & SGST. Thus Section 49A provides a restriction that ITC of IGST has to be first exhausted before utilizing the credit of CGST and SGST. The newly inserted section 49B provided that the order of utilization of ITC maybe prescribed by the government on the recommendation of the council.
This amendment creates a situation where the suppliers would be required to pay the tax in cash even when they have the unutilized ITC available in their electronic credit ledger as shown in the illustration II below.
Rule 88A
Subsequently to overcome this situation, CBIC vide Notification 16/2019 central tax dated 29th March 2019 inserted rule 88A in CGST Rules, 2017 prescribing the order of utilization of input tax credit. As per rule 88A, ITC of IGST shall be first utilised towards payment of IGST, and the remaining if any, may be utilised towards the payment of CGST and SGST in any order.
Consequently vide Circular No.98/17/2019 dated 23rd April 2019 clarified the same. According to this circular, following can be understood:
- IGST credit has to be first utilised for payment of IGST liability.
- Once IGST liability is fully paid and if any IGST credit is still remaining, it shall be utilized for the payment of CGST and SGST in any proportion at the option of the registered person.
- Once the ITC of IGST is completely exhausted, ITC of CGST may be used to pay the balance CGST liability and ITC of SGST may be used to pay the balance SGST liability.
- Where, ITC on IGST is not sufficient to pay the IGST liability, it may be paid by balance ITC of CGST remaining after paying CGST liability. IGST liability still remaining maybe paid by balance ITC of SGST remaining after paying SGST liability. (See illustration IV)
- However, ITC of CGST is not permitted to be utilized for the payment of SGST and vice versa.
Illustration
I. Before insertion of Section 49A
| Particulars | IGST | CGST | SGST |
| Output tax Liability | 1000 | 300 | 300 |
| ITC | 1300 | 200 | 200 |
| Output tax Liability | 1000 | 300 | 300 |
| Less: Utilization of CGST | (200) | ||
| Less: Utilization of SGST | (200) | ||
| Less: Utilization of SGST | (1000) | ||
| Balance Liability | – | 100 | 100 |
| Less: Utilization of remaining IGST | – | (100) | (100) |
| Balance Liability | – | – | – |
| Un-utilized IGST credit | 100 | – | – |
II. After insertion of Section 49A but before Rule 88A
| Particulars | IGST | CGST | SGST |
| Output tax Liability | 1000 | 300 | 300 |
| ITC | 1300 | 200 | 200 |
| Output tax Liability | 1000 | 300 | 300 |
| Less: Utilization of IGST | (1000) | (300) | |
| Less: Utilization of SGST | – | – | (200) |
| Balance SGST Liability | – | – | 100 |
| Un-utilized CGST credit | – | 200 | – |
III. After insertion of Section 49A and Rule 88A
Option 1
| Particulars | IGST | CGST | SGST |
| Output tax Liability | 1000 | 300 | 300 |
| ITC | 1300 | 200 | 200 |
| Output tax Liability | 1000 | 300 | 300 |
| Less: Utilization of IGST | (1000) | (200) | (100) |
| Less: Utilization of CGST | (100) | ||
| Less: Utilization of SGST | – | – | (200) |
| Balance Liability | – | – | – |
| Un-utilized CGST credit | – | 100 | – |
Option 2
| Particulars | IGST | CGST | SGST |
| Output tax Liability | 1000 | 300 | 300 |
| ITC | 1300 | 200 | 200 |
| Output tax Liability | 1000 | 300 | 300 |
| Less: Utilization of IGST | (1000) | (100) | (200) |
| Less: Utilization of CGST | (200) | ||
| Less: Utilization of SGST | – | – | (100) |
| Balance Liability | – | – | – |
| Un-utilized SGST credit | – | – | 100 |
IV. After insertion of Section 49A and Rule 88A where ITC on IGST is insufficient to pay IGST liability
| Particulars | IGST | CGST | SGST |
| Output tax Liability | 1000 | 300 | 300 |
| ITC | 700 | 500 | 500 |
| Output tax Liability | 1000 | 300 | 300 |
| Less: Utilization of IGST | (700) | – | – |
| Less: Utilization of CGST | (200) | (300) | |
| Less: Utilization of SGST | (100) | – | (300) |
| Balance Liability | – | – | – |
| Un-utilized SGST credit | – | (100) |
Conclusion
Presently, the common portal supports the order of utilization of input tax credit in accordance with the provisions before the insertion of Section 49A and Section 49B of the CGST Act.
Therefore it has been clarified in the circular that till the new order of utilization as per newly inserted Rule 88A of the CGST Rules is implemented on the common portal, taxpayers may continue to utilize their input tax credit as per the functionality available on the common portal.
