Dr. Sanjiv Agarwal, FCA, FCS

Sanjiv Agarwal

GST laws have been amended w.e.f. 01.02.2019 which inter alia includes amendment in manner of taking input tax credit amongst three formats of GST vis IGST, CGST and SGST. This has resulted in undue hardship to many taxpayers across the country.

The Government has amended CGST Act, 2017 vide CGST Amendment Act, 2018 with various changes w.e.f 01.02.2019 and one of the important amendment was made in Section 49 of CGST Act by introducing new section 49A to the CGST Act, 2017.

Goods and services tax involves two equal components on any transaction, CGST and SGST / UTGST. Inter-state supplies attract integrated goods and services tax (IGST), which is eventually apportioned between the Union and state Governments.

Law Prior to 1st February, 2019

Section 49 of the CGST Act, 2017 contains provisions in relation to payment of tax, interest, penalty and other amounts.

Section 49 (5) of CGST Act, 2017 provided manner of utilizing Input Tax Credit (ITC) for payment of GST output tax liability, e.g IGST can be set off against IGST and then CGST and SGST, CGST can be set off against CGST and then against IGST, and SGST can be set off against SGST and then against IGST.

Accordingly, the balance in credit ledger can be used only for making the payment of tax as CGST, SGST or IGST. Besides, the balance in such ledger will get reduced by amount of refund in case sought under the provisions of the Act.

The credit ledger shows the balance of credit lying in CGST, SGST or IGST. The amount under various heads of credit could be used in the following order of preference:

(i) IGST can be used:

(a) For payment of tax as IGST

(b) For payment of tax as CGST

(c) For payment of tax as SGST

(ii) CGST can be used:

(a) For payment of tax as CGST

(b) For payment of tax as IGST, in case balance is available

(iii) SGST can be used:

(a) For payment of tax as SGST

(b) In case balance available, payment of tax as IGST

The following matrix depicts the manner of availing input tax credit prior to 1st February, 2019, i.e. upto 31.01.2019: 

Payment for First set off from Then set off from

 Amended provision w.e.f. 01.02.2019

CGST (Amendment) Act, 2018 has inserted new sections 49A and 49B in the GST law w.e.f. 01.02.2019. Similar amendments have been made in other Acts for IGST, SGST etc.

Accordingly, Government has changed the order of setoff of input tax credit by introducing section 49A w.e.f. 01.02.2019 according to which, IGST Credit shall be set off fully before taking any setoff of CGST or SGST, which means earlier CGST/SGST ITC was used to set-off CGST /SGST liability, as the case may be, but now IGST Credit has to be first utilized fully for payment of IGST then for CGST and then for SGST liability as the case may be, even before utilization of ITC of CGST or SGST.

The following matrix explains the manner of credit w.e.f. 01.02.2019 for any tax payments to be made:

Payment for First set off from Then set off from

Change and impact

The new amendment in the manner of taking audit will impact the working of all FADA members so much so that there will be less amount of total credit available to a taxpayer in a given period as compared to pre-amendment period. It will create paradox where on one hand dealers have credit available in any of the three formats of tax (IGST / CGST / SGST) but on the other hand, they are made liable to discharge GST liability in cash.

Thus, IGST credit is to be used against IGST and also IGST first need to be set off against CGST and then only CGST credit can be set off against CGST.  Also, the ITC of CGST can’t be utilized against the SGST or vice-versa.

One of the major positive impact for the states and revenue (and adverse for assesses) of the change in matrix for claiming input tax credit w.e.f. 1st February, 2019 will be that it will force the taxpayers to pay IGST out of pocket inspite of there being unutilized credit of CGST or SGST or UTGST lying in their electronic credit ledger. They cant use such input tax credit unless the IGST has been fully exhausted.

Not only this, another major concern arising out of this amendment is that it restricts the seamless flow of ITC to the dealers across the board which will also impact the working capital requirements as well as increase the cost of funds to the dealer. All this would happen for no logical fault of dealers but merely because of an anomaly in the prescribed manner of taking credit needless to say the earlier manner was logical, tax friendly and ensured the seamless credit which is the primary objective of GST law.

The aforementioned amendment results into undue hardship to the assessees as it shifts the manner of taking credit giving first preference to IGST which was not the case prior to 01.02.2019. The  main reason for this is the fact that while dealers are located across the country, vehicle manufacturers are few in numbers and are located in very few states.

The new provisions restrict using credits for central and state components of the goods and service tax (CGST and SGST) unless credits for taxes paid on inter-state transactions are fully used. The amendment prescribes the order in which credits for past payment of various components of goods and services tax can be adjusted against the tax liability on the final output of a business.

This, in many cases would lead  to a situation where the more flexible integrated goods and services credit is used up for paying CGST liability fully, forcing businesses to pay  fully or partly SGST liability in cash, thus taking away the flexibility in utilization of tax credits. Unlike credits for integrated goods and services, the same for CGST and SGST can’t be cross-utilized. This result in tax payment in cash while tax credits remain on the books of the company.

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June 2021