Summary: When a Goods and Services Tax (GST) rate is reduced with the condition of no Input Tax Credit (ITC) availment, a key question for businesses is the fate of their existing accumulated ITC. The accumulated ITC does not automatically lapse; it remains in the electronic credit ledger but becomes stranded, as it cannot be used for the new, lower-taxed supplies. The Goods and Services Tax Act does not permit a refund for this unutilized credit, as refunds are only allowed for zero-rated supplies or inverted duty structures. However, businesses can still utilize this credit against other eligible outward taxable supplies they might make in the future. Since the stranded ITC no longer offers a future economic benefit, it should be written off as an expense in the company’s financial records, such as the Profit and Loss Account. Businesses and industry bodies expect governing authorities like the GST Council to issue clarifications and consider transitional mechanisms to allow for the utilization or transfer of this stranded credit to mitigate financial hardship.
Where the GST rate was reduced to 5% but with the condition of no ITC availment and if we have accumulated ITC then what would be the impact w.r.t. that accumulated ITC?
- Whether that ITC availed would be lapsed?
- Whether we can claim refund of that accumulated ITC?
- Whether we can utilize that ITC against other taxable supplies where ITC is permissible?
- What other options we would have?
In this Article we would try to find out answers to the above questions and expectations from the governing bodies.
Let’s dive into it…
Whether that ITC availed would be lapsed?
- Past ITC already availed up to the date of rate change remains valid.
- Accumulated ITC till date is not lapsing.
- It will remain in our electronic credit ledger.
- ITC balance till date does not lapse automatically, but becomes stranded credit.
- Effectively, the ITC becomes stranded / unusable.
Whether we can claim refund of that accumulated ITC?
- Section 54(3) of the CGST Act permits refund of unutilized ITC only in two cases:
a) Zero-rated supplies (exports, SEZ supplies), or
b) Inverted duty structure (inputs taxed at higher rate than output).
- Change in rate to 5% without ITC does not fall under either of these.
- Hence, no refund is allowed.
Whether we can utilize that ITC against other taxable supplies where ITC is permissible?
- We can continue to utilize this ITC against any eligible outward taxable supplies (if any) or until it is exhausted.
- It can only be adjusted if in the future we make any other taxable outward supplies that allow ITC.
What other options we would have?
- Unutilisable ITC is not an asset, since it does not give us future economic benefit.
- Therefore, it should be written off as an expense in the Profit & Loss A/c.
- Typically, it will be charged under “Indirect Taxes (Unutilisable ITC written off)” or added to the cost of services.
- Once written off in books, it becomes a deductible expense under the Income-tax Act (unless specifically disallowed).
- Courts have held that irrecoverable taxes form part of the cost of business.
Expectation from the Governing Bodies
In such situations, the business community at large expects that the GST Council / CBIC / ICAI may:
- Issue a clarificatory circular (on lines of earlier clarifications for restaurants and ice-cream parlours) confirming that refund is not available, but credit balance shall remain in the ledger.
- Consider introducing a one-time transition mechanism, allowing utlisation / transfer of such stranded ITC to mitigate hardship.
- Evaluate the financial burden on affected industries and consider relief measures such as:
1. Allowing limited set-off against future liabilities, or
2. Providing a special scheme for adjustment / write-off recognition
Hope this write-up will serve you. Be Blissful.
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