Rule 88A of Central Goods and Services Tax (CGST) Rules, 2017 read with Section 49(5), 49A and  49B of CGST Act, 2017 deals with Order of utilization of input tax credit.  Rule 88A is been inserted vide Inserted vide  Notification No. 16/2019-Central Tax (Dated 29th March, 2019) and Section 49A and  49B were inserted vide CGST (Amendment) Act, 2018 notified w.e.f. 01.02.2019.

1. Let us consider the below case to first appreciate the issue under discussion:

Tax heads ITC Amount Liability
IGST 100
CGST 100 150
SGST 100 150

2. From the above it would appear logically (not necessarily legally) that the registered person in question should not be asked to deposit any tax by cash since the amount of total input tax credit (“ITC) of INR 300 is equal to the amount of total liability (INR 300). But then law does not always work on logic.

3. Let us now consider the manner of the utilization of the said ITC falling under different tax heads against the liabilities also falling under the different tax heads by only considering Sec. 49 of the CGST Act, 2017.

4. Relevant portion of Sec. 49(5) of the CGST Act, 2017 reads as under:

“(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of —

(a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;

(b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;

(c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

Provided that the input tax credit on account of State tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

Provided that the input tax credit on account of Union territory tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and

(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.”

5. Plain reading of the above provisions will suggest that the tax payer is free to choose any tax head first where ITC is available for utilization. However once a particular tax head is chosen (let us say IGST), then the utilization shall be as per the given order. In case of IGST, Sec. 49(5)(a) supra provides that the ITC lying in the said head shall first be utilized towards the payment of IGST and the balance, if any, may be utilized for paying the liability under CGST and SGST/UTGST in that order. Let us now apply the said provision to the issue before us.

6. If the registered person first chooses IGST ITC for utilization, INR 100 lying therein will be utilized for paying CGST (in absence of any IGST liability). Hence after the said stage, CGST liability shall be reduced to INR 50. Now if the registered person chooses CGST ITC, he shall offset the ITC of INR 50 against the pending CGST liability. Hence the CGST ITC of INR 50, which is still available but cannot be used for paying SGST liability, shall be carry forwarded. Now coming to SGST, as the ITC is of INR 100 whereas liability is of INR 150, the registered person in question utilizing the ITC in the manner described above would end up with the cash payment of SGST of INR 50. Obviously no wise men would carry forward INR 50 under CGST and at the same time pay SGST of the same amount in cash. Hence what should the wise men do in such case ?

7. As stated earlier, Sec. 49(5) supradoes not stipulate the manner for selection of the head under which ITC is available and the registered person wants to utilize the same. However once a particular head is selected, the registered person is bound to follow the order prescribed. With such background the wise person in our case would first chose SGST head and CGST head where ITC of INR 100 each is lying and utilize the same in paying respective liabilities. After the said stage liability of INR 50 would remain outstanding under both the said heads. Now he would go to the IGST head and use INR 100 from the available ITC amount and offset the same against the liability of INR 50 each under CGST & SGST. By this manner he would not be required to pay any tax amount in cash.

8. Now enters Sec. 49A and Sec. 49B as inserted vide CGST (Amendment) Act, 2018 notified w.e.f. 01.02.2019. Sec. 49A in a nutshell provides that the IGST ITC must be utilized first and only thereafter CGST/SGST ITC can be utilized. These provisions have been formulated to cure the issue of huge amount of IGST remaining unallocated to the State’s pending their utilization (readers may refer our article dated 15.02.2019 for detailed analysis). Hence if the said provisions are applied, the outcome would be the same as discussed earlier at paragraph no. 6 above wherein the registered person would be required to pay SGST in cash whereas he shall carry forward CGST balance. Sec. 49B grants power to the Government to stipulate the order and manner of utilization of ITC notwithstanding any other provision (except Sec. 49(5)(e)/(f) which prohibits cross utilization of CGST against SGST and vice-versa).

9. Of course the solution found vide Sec. 49A & 49B was flawed (again readers may peruse our earlier article on the said topic). Hence the notifications issued with regard to filing and payment of taxes in the context of GSTR-3B even after 01.02.2019 (refer Notification No. 13/2019 – Central Tax) continued to provide for payment of tax as per Sec. 49 and not Sec. 49A. Accordingly even the GSTN portal continued to adopt the earlier system of utilization wherein freedom was granted to the tax payer to choose the head first for utilizing the ITC.

10. Although the notifications in the context of GSTR-3B only referred to Sec. 49 and not Sec. 49A or 49B, it was not the perfect legal way of deferring the implementation of the newly inserted provisions. This is because the powers granted u/s 168 read with Rule 61(5), which stipulates filing of GSTR-3B, is to prescribe the manner and conditions subject to which said GSTR-3B can be sought to be filed. It however does not grant power to pick and choose some sections of the Act (in our case Sec. 49A), though in force, and not enforce the same. However since the scheme of things as in existence even after 01.02.2019 were beneficial to the tax payer, nobody complained.

11. Now vide Notification No. 16/2019 – Central Tax dated 29.03.2019 issued by exercising the powers u/s 164 a new Rule viz. Rule 88A has been inserted. Said rule provides as under:

“Rule 88A. Order of utilization of input tax credit.- Input tax credit on account of integrated tax shall first be utilised towards payment of integrated tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order: 

Provided that 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.”

12. Idea seems to be to restore the status-quo, albeit legally. However the said new Rule is also posing some issues which are now discussed hereinafter.

13. Said Rule has been issued by exercising the powers given to the Government u/s 164 of the CGST Act, 2017. Sec. 164(1) grants power to the Government to form Rules for “carrying out the provisions of the Act”. Sec. 49B as inserted w.e.f. 01.02.2019 grants power to the Government to prescribe the order and manner of the utilization of the input tax credit. Hence one can say that the power to prescribe the order and manner of the utilization of input tax credit contrary to Sec. 49A can be exercised only by invoking Sec. 49B since the same is created especially for such situation. General power granted by Sec. 164 would not apply in such case.

14. Said conclusion would be further fortified from the fact that Sec. 164 grants wider power to the Government to carry out the provisions of the Act. It obviously does not grant power to alter the provisions of the Act. Express provisions dealing with the order and manner of the utilization contained u/s 49 & 49A can be altered only by exercising the powers granted u/s 49B and not u/s 164. Interpreting it otherwise would also mean that Sec. 49B is redundant as Sec. 164 already grants power to the Government prescribe the order and manner of the utilization of ITC contrary to Sec. 49 read with Sec. 49A. Hence we are of the view that the insertion of the said Rule 88A by wrongly exercising the power u/s 164 is not tenable.

15. Above conclusion can however pose a serious problem. This is because if the said Rule is held to be void, Sec. 49 read with Sec. 49A becomes clearly applicable. Hence if the same is applied the problem for which Rule 88A has been inserted will not be cured. In other words, the problem of making cash payment even if enough ITC is available will persist.

16. Hence let us assume that no registered tax payer would challenge the legal validity of the said Rule 88A (except a few who may be benefitted by such challenge). Thus assuming that Rule 88A is valid, there is one more issue which remains to be addressed.

17. Said Rule as referred supraclearly provides that IGST ITC has to be utilized first towards the payment of the IGST liability. Any balance remaining thereafter may be utilized towards payment of CGST and SGST as the case may be.

18. In our example thus, the IGST ITC of INR 100 has to be first utilized for paying IGST liability. In our case it is nil. Hence the balance (INR 100) may be utilized for payment of CGST and SGST. Now if the registered tax payer uses the entire INR 100 for paying CGST, he would end up paying INR 50 under SGST. Same is described hereinunder:

Tax heads ITC Amount Liability 1st Adjustment 2nd Adjustment Balance to be  paid in Cash Balance ITC
IGST 100
CGST 100 150 150-100 (IGST) 50-50 (CGST) 50
SGST 100 150 150-100 (SGST) 50

19. If he chooses to adjust IGST of INR 100 against SGST first, then the result would be that INR 50 of SGST would be carry forwarded and INR 50 of CGST would be paid in cash.

20. Hence in both the above scenarios he would not be better-off. Hence the registered tax payer in question would want to utilize INR 50 of IGST ITC against CGST and the balance INR 50 against SGST. Thereafter he would want to utilize respective CGST & SGST ITC. Same shall be as under:

Tax heads ITC Amount Liability 1st Adjustment 2nd Adjustment Balance to be  paid in Cash Balance ITC
IGST 100
CGST 100 150 150-50 (IGST) 50-50 (CGST)
SGST 100 150 150-50 (IGST) 50-50 (SGST)

21. Now the question is whether the registered tax payer can do such partial utilization of the IGST ITC. The said question stems from the fact that Rule 88A (1) allows the utilization of the balance IGST ITC against CGST and SGST “in any order”. Hence apparently it would mean that freedom has been allowed to use the balance IGST against CGST and SGST but in any order. Hence either the registered person can pick CGST liability first and SGST second or visa-versa. In other words the registered person cannot off-set the IGST ITC partially towards CGST and SGST.

22. We are of the view that such partial off-set is possible due to the following reasons:

a) Said Rule says that the balance amount of IGST may be utilized for payment of “CGST and SGST, as the case may be, in any order”. Hence the words “CGST and SGST” has to be considered as one group and the IGST ITC can be utilized for payment of CGST and SGST as the case may be (i.e. as per the requirement) in any order. Hence the amount of IGST ITC to be utilized inter se between CGST and SGST can differ as per the requirement. Thus it is clear that partial off-set is available.

b) Close reading of Rule 88A would also suggest that the word “may” appearing therein grants freedom to the registered person to choose any order (including partial off-set) of utilization of the balance IGST ITC. If the intention is to follow any order the word used would have been “shall”.

c) Further any interpretation done otherwise would also defeat the purpose of the new Rule.

23. Hence we conclude by saying that although the intention behind the new Rule is noble, the manner of execution is not legal. It would have been better if the same would have been enacted by exercising the powers granted by Sec. 49B. However whichever way one looks at it, the end result will be welcomed by the industry as the cash flow problem is now solved.

(views are strictly personal)

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