Under the proposed GST Law, tax components could be CGST/SGST/IGST. CGST & SGST is leviable on intra-state supplies whereas IGST is levied on inter-state supplies. CGST represents tax belonging to Central Government; SGST represents tax belonging to respective State Government and IGST represents a tax levied and collected by the Central Government which would be containing share of both the Central and the State Government.
2. Cross utilization of credits:
2.1 Since the Law allows utilization of credit of one component of tax against the other in different situations except for utilization of CGST for SGST and vice versa, the Government needs to do a lot of background accounting to keep the respective accounts of CGST/SGST/IGST straight and compute the respective balances of these accounts after making the respective transfers of funds from one account to the other depending on the computation of taxes paid in a given account and utilization of these taxes as credit for making tax payment in the other account.
2.2 For this, the related provisions are incorporated in Section 35(5) & Section 37A of the MGL and Section 7(5) and Section 9 of IGST Act. A combined reading of all these provisions reveals how the government would work out the balances in the respective accounts and transfer the respective funds on the basis of information contained in the valid returns submitted by the taxable person for each tax period:
1. Order of Utilization of credit: The amount of ITC on account of IGST is allowed to be utilized towards payment of IGST, CGST and SGST in that order. Similarly the amount of ITC on account of CGST is allowed to be utilized for payment of CGST and thereafter for payment of IGST. Further the amount of ITC on account of SGST is allowed to be utilized for payment of SGST and thereafter for payment of IGST. ITC of CGST cannot be utilized for payment of SGST liability and vice versa. (Section 37(5) of MGL and Section 7(5) of IGST Act).
2. Utilization of input tax credit of CGST for payment of IGST: When the ITC of CGST is used for payment of IGST by the taxable person, Central Government has to receive an amount equal to the CGST so utilized in the IGST account. Thus the Central Government would be required to transfer the fund from CGST account to IGST account equivalent to the amount of ITC of CGST used for payment of IGST. This is important because even though both CGST and IGST accounts are maintained by the Central Government, the distribution of CGST and IGST is to be made in a different manner and therefore, the balances in the respective accounts need to be maintained separately and transfer of funds need to made for this purpose. (Section 37A (1) of MGL).
3. Utilization of input tax credit of SGST for payment of IGST: When the ITC of SGST is used for payment of IGST by the taxable person, Central Government has to receive an amount equal to the SGST so utilized in the IGST account. Thus the State Government would be required to transfer the fund from SGST account to IGST account equivalent to the amount of ITC of SGST used for payment of IGST. (Section 37A (2) of MGL).
4. Utilization of input tax credit of IGST for payment of CGST: When the ITC of IGST is used as credit for payment of CGST by the taxable person, Central Government has to receive an amount equal to the IGST so utilized in the CGST account. Thus the Central Government would be required to transfer the fund from IGST account to CGST account equivalent to the amount of ITC of IGST used for payment of CGST. This is important because even though both CGST and IGST accounts are maintained by the Central Government, the distribution of CGST and IGST is to be made in a different manner and therefore the balances in the respective accounts need to be maintained separately and transfer of funds need to be made for this purpose (Section 9 (1) of IGST Act).
5. Utilization of input tax credit of IGST for payment of SGST: When the ITC of IGST is used as credit for payment of SGST by the taxable person, State Government has to receive an amount equal to the IGST so utilized in SGST account. Thus the Central Government would be required to transfer the fund from IGST account to SGST account equivalent to the amount of ITC of IGST used for payment of SGST. (Section 9 (2) of IGST Act).
3. Apportionment of tax collected under IGST Act and settlement of funds:
3.1 Given the above scheme of transfer of funds in the CGST/SGST and IGST accounts inter-se, there is a further need of apportionment of taxes from the IGST account to the central and the State government(s) as this is the only component which is having share of both governments. Section 10 of the IGST Act governs the principles for such apportionment. Broadly, the distribution of the IGST to the Centre and the States would take place with respect to the taxes collected on the supplies in which credit chain is stopped. Further, the manner prescribed by the provision indicates that – first the amount for distribution is computed for the central government taking the applicable CGST rate as the basis of apportionment of the amount to the CGST account of the central government, and the residual amount is distributed to the States in their respective SGST accounts.
3.2 The provision indicates following situations where credit chain could be stopped, and the respective amount payable as CGST is to be identified and apportioned to CGST account:
1. Where inter-state supplies are made within India or from outside India by way of imports, to an unregistered person;
2. Where the inter-state supplies are made within India or from outside by way of imports, to a taxable person paying taxes under composition scheme (under section 8 of the MGL);
3. Where the inter-state supplies are made within India or from outside India to India by way of imports, to a taxable person not eligible to claim the input tax credit;
4. Where inter-state supplies are made within India or from outside India by way of imports, to a taxable person who does not avail the said credit within the specified period and thus the credit remains in the IGST account after the expiry of due date for filing of annual return, i.e. 31st December of the next year from the year to which the credit pertains.
3.3 In all the above cases, the amount of tax calculated at the rate equivalent to the CGST on similar intra-state supply shall be apportioned to the Central Government and the amount so calculated would be transferred from IGST Account to the CGST Account.
3.4 Now, in respect of the supplies for which apportionment has been done for CGST as above, the rest of the amount of IGST shall be apportioned to the States in their respective SGST accounts where such supply has taken place. The amount so calculated would be transferred from IGST Account to the SGST Account. The place of such supply shall be determined according to the provisions contained in Section 5 and 6 of the IGST Act dealing with the Place of Supply of Goods and Place of Supply of Services respectively.
3.5 Section 10 of the IGST Act further provides that the amount of interest and penalty collected on any supplies for which IGST has been apportioned to CGST and SGST as above, shall also be apportioned in the same manner.
4. Amount in CGST, SGST and IGST Account:
4.1 It may be noted that in view of above discussions, CGST Account would comprise of the following:
a) CGST from intra-state supplies;
b) Add: Transfer from IGST account on account of utilization of ITC of IGST for payment of CGST;
c) Add: CGST component of IGST from inter-state supplies / imports to an unregistered person, to a composition taxable person, to a taxable person not eligible for ITC or to a registered taxable person who has not availed ITC;
d) Less: Transfer from CGST on account of utilization of ITC of CGST for payment of IGST.
4.2 Similarly in view of above discussions, SGST Account would comprise of the following:
a) SGST from intra-state supplies;
b) Add: Transfer from IGST account on account of utilization of ITC of IGST for payment of SGST;
c) Add: SGST component of IGST from inter-state supplies / imports to an unregistered person, to a composition taxable person, to a taxable person not eligible for ITC or to a registered taxable person who has not availed ITC;
d) Less: Transfer from SGST on account of utilization of ITC of SGST for payment of IGST.
4.3 Further, IGST Account would comprise of the following:
a) IGST from inter-state supplies;
b) Add: Transfer from CGST account on account of utilization of ITC of CGST for payment of IGST;
c) Add: Transfer from SGST account on account of utilization of ITC of SGST for payment of IGST;
d) Less: Transfer from IGST account on account of utilization of ITC of IGST for payment of CGST;
e) Less: Transfer from IGST account on account of utilization of ITC of IGST for payment of SGST;
f) Less: CGST and SGST (IGST – CGST) component of IGST from inter-state supplies / imports to an unregistered person, to a composition taxable person, to a taxable person not eligible for ITC or to a registered taxable person who has not availed ITC.
5. Conclusion:
5.1 It may be seen that the above mentioned provisions would facilitate cross utilization of ITC thus obviating the need for filing of refund claims by the taxable persons in case of inter-state supplies.
5.2 Normally, at the end of the year there should not be any balance in the IGST account as the entire amount should be either transferred to CGST or the SGST account. In any case, the balance, if any is left in the IGST account as well as the amount in CGST account would be devolved to the States in accordance with Article 270 of the Constitution.
ANNEXURE
LIST OF RELEVANT PROVISIONS
1. Section 35(5): Payment of tax, interest, penalty and other documents
2. Section 37A: Transfer of input tax credit
3. Section 7(5): Payment of tax, interest, penalty and other documents
4. Section 9 of IGST Act: Transfer of input tax credit
5. Section 10 of IGST Act: Apportionment of tax collected under the IGST Act and settlement of funds
