Change in order of set-off of Input Tax Credit (ITC) and impact on your working capital

Introduction

CGST (Amendment) Act, 2018 has come into force w.e.f. 01/02/2019. Apart from various changes that were made by it, one significant change has been made in the order in which input tax credit has to be set-off. Let us analyse the same.

Analysis 

First of all, let us have a look at provisions which got changed

A new section 49A has been inserted which reads as under-

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

With regard to above, following points merit consideration:

  • The credit of IGST has to be first utilized against payment of IGST and then towards CGST and SGST even before using the available credit of later ones.
  • Even if the credit of CGST and SGST is available, they can be used only after using all the IGST credit against payment of CGST and SGST.
  • It seems that intent behind making IGST credit exhausted fully would be to have more revenue collection to the States because CGST and SGST cannot be set-off internally and there is no change in that rule.

This change is likely to affect working capital of many taxpayers depending on their nature of business and availability of credit with them. However, states can get more revenue by this change. This may be considered as a state-friendly change of GST Council. Different situations are provided in the annexure attached to the file. Practical scenario will depend on facts and circumstances of each taxpayer.

Download Annexure

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