We know that ITC (Input tax Credit) plays a very vital role in GST and avoids cascading effect to a very large extent.
The order of utilization of ITC (Input Tax Credit) has undergone a lot of changes in the recent past.
There are 3 phases for the same:
1st phase (w.e.f 01.07.2017 to 31.01.2019).
Section 49(5) of CGST Act 2017 provides the order of utilization of ITC.
It provides that IGST ITC has to be first used for payment of liability under IGST, then CGST and then SGST.
CGST ITC has to be first used for payment of liability under CGST and then IGST.
SGST ITC has to be first used for payment of liability under SGST and then IGST.
CGST and SGST ITC can’t be set off against each other.
This can be illustrated with the help of following table:
| Payment for | First set off from | Condition | Then set off from |
| IGST | IGST | No condition prescribed | CGST and SGST |
| CGST | CGST | IGST | |
| SGST | SGST | IGST |
2nd phase (w.e.f 01.02.2019 to 31.03.2019).
After insertion of section 49A and 49B, the ITC on account of IGST has to be utilized first before ITC of CGST/SGST can be utilized for discharge of any tax liability.
This can be illustrated based on the below table:
| Payment for | First set off from | Condition | Then set off from |
| IGST | IGST | IGST ITC has to be completely utilised first before making use of CGST/SGST ITC | CGST and SGST |
| CGST | IGST | CGST | |
| SGST | IGST | SGST |
3rd phase (w.e.f 01.04.2019).
Rule 88A under CGST Rules 2017 has been inserted w.e.f 01.04.2019, which provides that IGST ITC has to be first utilized for payment of IGST liability and the remaining balance of IGST ITC can be used towards payment of CGST/SGST liability in any order.
This can be illustrated based on the below table:
| Payment for | First set off from | Condition | Then set off from |
| IGST | IGST | IGST ITC has to be completely utilised first before making use of CGST/SGST ITC | CGST and SGST |
| CGST | IGST credit in any order or proportion | CGST | |
| SGST | SGST |
We can understand the above provisions with the help of below example:
Example :
Say a dealer has following output liability and Input tax Credit at end of month
| Particulars | IGST | CGST | SGST | Total |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 |
| Available ITC balance | 1,300.00 | 200.00 | 200.00 | 1,700.00 |
Find out the amount of tax to be paid and closing ITC balance after set off of ITC.
Solution:
1st phase (w.e.f 01.07.2017 to 31.01.2019).
If the month would have been between 01.07.2017 to 31.01.2019.
| Particulars | IGST | CGST | SGST | Total | Closing Balance |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 | – |
| ITC for: | |||||
| CGST | 200.00 | 200.00 | – | ||
| SGST | 200.00 | 200.00 | – | ||
| IGST | 1,000.00 | 100.00 | 100.00 | 1,200.00 | 100.00 |
| Total ITC | 1,000.00 | 300.00 | 300.00 | 1,600.00 | 100.00 |
| Cash payment to be made | NIL | NIL | NIL | NIL |
2nd phase (w.e.f 01.02.2019 to 31.03.2019).
If the month would have been between 01.02.2019 to 31.03.2019.
| Particulars | IGST | CGST | SGST | Total | Closing Balance |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 | – |
| ITC for: | |||||
| CGST | – | 200.00 | |||
| SGST | 200.00 | 200.00 | – | ||
| IGST | 1,000.00 | 300.00 | – | 1,300.00 | – |
| Total ITC | 1,000.00 | 300.00 | 200.00 | 1,500.00 | 200.00 |
| Cash payment to be made | – | – | 100.00 | 100.00 |
Hence we can see that in 2nd phase (i.e after insertion of sec 49A) payment of SGST of Rs 100 is required to be made even when there is excess balance in Electronic Credit Ledger.
3rd phase (w.e.f 01.04.2019).
If the month would have been after 01.04.2019
| Option 1 | |||||
| Particulars | IGST | CGST | SGST | Total | Closing Balance |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 | – |
| ITC for: | |||||
| CGST | 200.00 | 200.00 | – | ||
| SGST | 100.00 | 100.00 | 100.00 | ||
| IGST | 1,000.00 | 100.00 | 200.00 | 1,300.00 | – |
| Total ITC | 1,000.00 | 300.00 | 300.00 | 1,600.00 | 100.00 |
| Cash payment to be made | NIL | NIL | NIL | NIL |
| Option 2 | |||||
| Particulars | IGST | CGST | SGST | Total | Closing Balance |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 | – |
| ITC for: | |||||
| CGST | 100.00 | 100.00 | 100.00 | ||
| SGST | 200.00 | 200.00 | – | ||
| IGST | 1,000.00 | 200.00 | 100.00 | 1,300.00 | – |
| Total ITC | 1,000.00 | 300.00 | 300.00 | 1,600.00 | 100.00 |
| Cash payment to be made | NIL | NIL | NIL | NIL |
| Option 3 | |||||
| Particulars | IGST | CGST | SGST | Total | Closing Balance |
| Output tax | 1,000.00 | 300.00 | 300.00 | 1,600.00 | – |
| ITC for: | |||||
| CGST | 150.00 | 150.00 | 50.00 | ||
| SGST | 150.00 | 150.00 | 50.00 | ||
| IGST | 1,000.00 | 150.00 | 150.00 | 1,300.00 | – |
| Total ITC | 1,000.00 | 300.00 | 300.00 | 1,600.00 | 100.00 |
| Cash payment to be made | NIL | NIL | NIL | NIL |
Hence we can conclude that in 2nd phase (i.e after insertion of section 49A) payment of SGST of Rs 100 was required to be made. But by way of insertion of Rule 88A, this payment of SGST has been dispensed with.
Difference in the provisions of the law and set off mechanism in GST portal
We know that we can take Input tax Credit by way of filing GSTR3B in GST portal.
While filing GSTR3B the set off of ITC happens automatically and there is no manual intervention (i.e dealer can’t change the order of utilization of ITC).
As of now the GST portal allows ITC set off under the old provisions (i.e without incorporation of section 49A and Rule 88A) and the dealer can’t change the order of utilization of ITC to incorporate the provisions of section 49A and Rule 88A while filing GSTR3B.
In order to bring out clarification Circular No. 98/17/2019-GST dated 23.04.2019 has been issued which provides that taxpayers may continue to utilize their input tax credit as per the functionality available on the GST portal.
So in short the dealer can’t be penalized for non compliance of provisions section 49A and Rule 88A as the ITC set off order is auto filled by GST portal. The same has been ratified by the above Circular No 98/17/2019 dated 23.04.2019 as well.
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