As per section 49(5) of the CGST Act, the IGST credit was allowed to be used for payment of CGST and SGST output liability once the input credit on account of input CGST and SGST credit was fully utilised. This method allowed taxpayers to utilise the credits to its fullest and cash payouts were required only when the credits are fully exhausted.
As per the amended set-off mechanism applicable wef February 1, 2019 under section 49A of the CGST Amendment Act 2018, a GST registered person is required to first utilise its entire IGST credit towards the payment of output IGST liability. The balance of IGST credit will then be used for payment of CGST and SGST liability, respectively. The credit balance available in the SGST and CGST credit pool can be used only when the IGST credit pool is fully utilised. This means that taxpayers are required to follow the new mechanism while filing their GSTR-3B for the month of February 2019. The GST Council had prescribed this new set-off mechanism to reduce the fund settlement amongst central and state governments on account of IGST but this amendment has created an anomaly wherein credit of CGST will get accumulated and SGST output liability will have to be discharged in cash in certain cases.
Taxpayers whose local purchases are more than interstate purchases will remain unaffected with the new mechanism. Companies which have more Imports & interstate purchases may be hit with this new offset mechanism as this may have significant working capital impact. The importers and companies having interstate purchases will have large amounts of CGST credit balances lying in their credit ledger as on date.
This new method of credit set-off will disrupt the fundamental advantage of fungibility of credits. This may also be viewed as cascading of taxes which defeats the basic concept of GST. Corporates expect the government to review these issues & take the necessary corrective action or it may force all companies to redesign their supply chain models which may be costly or less viable.