1. Concept note on the GST issued by CBIC beautifully captures the design of the GST which has been implemented in our country. Same reads as under:

“The IGST model is a unique contribution of India in the field of VAT. The IGST Model envisages that Centre would levy IGST (Integrated Goods and Service Tax) which would be CGST plus SGST on all inter-State supply of goods or services or both. The inter-State supplier will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The person based in the destination State will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.”

2. Alas did the Council knew at the time of implementing the GST that the said unique contribution of India has a cash flow issue. Let us discuss the issue first and then turn to the faulty solution which have been imposed on the tax payer’s w.e.f. 01.02.2019.


3. Let us consider an illustration to understand the case. Suppose a manufacturer based in Gujarat supplies goods to a distributor in Uttar Pradesh. Hence such manufacturer shall let us say charge IGST of INR 100 on such supply. ITC of the same shall be availed by the distributor. Such distributor also procures certain goods locally wherein ITC availed is INR 10 each under CGST & SGST. Hence total ITC availed under all the three heads is INR 120.

4. Now let us assume that the outward liability for the said month is of INR 30 each under CGST & SGST (since the distributor predominantly makes local sales). Thus total liability is of INR 60. Liability being lower than the ITC could be due to lower sales in the said month as compared to the purchases. Now when such distributor files his return, he can set-off ITC of INR 10 each under CGST & SGST against the respective liabilities. The balance liability of INR 20 each under both the heads will be paid by utilizing IGST credit. Hence after filing the return, such distributor shall be left with IGST credit of INR 60 in his electronic credit ledger. It must be remembered that the said sum of INR 60 forms part of the INR 100 which has already been paid by the Gujarat manufacturer. Hence on one hand, the Central Government has got INR 100 but at the same time cannot allocate INR 60 out of the same since the same has not been utilized by the distributor.

5. Said sum thus remains in the Consolidated Fund of India pending allocation. Hence the State’s which are eventually beneficiaries of the part of the said unallocated funds are deprived of the cash flows. The same shall however in ordinary course get eventually devolved on the States as and when the distributor utilizes the balance lying in the IGST credit ledger. But who wants to wait ??

6. It has been reported that the unallocated IGST lying with the Central Government amounts to more than INR 1,80,000/- crores. In fact the amount is so huge that the Deputy Chief Minister of Delhi Mr. Manish Sisodia has questioned the IGST model and has also called for abolition of the same. Even though the reaction seems extreme, the problem of cash flow still remains.



7. One of the solutions adopted by the Council relates to an amendment in Sec. 49(5) as well as insertion of Sec. 49A as well as Sec. 49B of the CGST Act, 2017 vide CGST (Amendment) Act, 2018. Said amendments, which have been made applicable from 01.02.2019, provides that ITC available in the CGST as well as SGST credit ledger can be utilized only after the balance lying in the IGST credit ledger is completely exhausted. Coming to our illustration, now the distributor has to first utilize IGST balance of INR 100 for payment of IGST, CGST & SGST in that order and only if the said balance is exhausted, that the distributor can go to CGST and only after exhausting CGST (against CGST first and then IGST) can the distributor go to SGST (against SGST first and then IGST). Hence as opposed to the earlier system, where the distributor can use CGST & SGST first and choose to keep the balance in IGST, in the new system IGST has to be exhausted first. Hence in our example, if new system is followed by the distributor, he shall use IGST of INR 60 for paying the liability under CGST & SGST of INR 30 each and thus will be left with the IGST balance of INR 40 as compared to the balance of INR 60 as per the earlier system. Thus to the tune of IGST of INR 20 (in our case) the fund settlement shall happen in the current month itself.


8. Another solution adopted by the Council relates to an amendment in Sec. 17 of the IGST Act, 2017 vide IGST (Amendment) Act, 2018. Said provision deals with the apportionment of tax and settlement of funds. The amendment, made effective from 01.02.2019, provides that the unallocated balance can be apportioned on provisional basis in the ratio of 50:50 between the Central Government and the State Governments. Same shall be done on ad hoc basis. This is so because no one knows how the unallocated IGST shall be eventually utilized. In our example, it is possible that the distributor in question can make further inter-state sale of goods in stock and hence utilize the IGST balance against the IGST liability. In such case no amount shall devolve on the State out of the unallocated IGST. The amendment also provides that the said ad hoc allocations shall be adjusted finally against the actual figures.


9. We have no problem with the second approach adopted by the Council wherein the unallocated IGST shall be apportioned on the provisional basis. Enough past data sets are now available to make such allocation as near to the actual figures as possible. We have however huge concern about the first approach adopted by the Council wherein tax payers have been forced to utilize the IGST credit balance first. Our concern rests on the following arguments:

a) Compulsion to adjust IGST first can be applied only for those cases where after the adjustment of the credit, supplier will still be left with certain credit balances. Below illustration shall clarify the point:

Tax ITC  Liability 1st Adjustment 2nd Adjustment Balance to pay in cash Balance ITC
IGST 100
CGST 100 150 INR 100 paid from IGST Balance INR 50 paid from CGST 50
SGST 100 150 INR 100 paid from SGST 50

As seen from the above illustration, even if total ITC (INR 300) is equal to the output liability (also INR 300), application of the new system of utilization shall result in the cash payment of SGST of INR 50 whereas the balance of INR 50 shall remain in CGST credit ledger. Hence it is submitted that in such cases, even if old system would have been applied, the same would have resulted in the utilization of all the ITC and the Government would not be left with the problem of unallocated IGST. Utilization under the old system would have happened as under:

ITC ITC Amount Liability 1st Adjustment 2nd Adjustment Balance to Pay in Cash Balance ITC
IGST 100
CGST 100 150 INR 100 paid from CGST INR 50 paid from IGST
SGST 100 150 INR 100 paid from SGST INR 50 paid from IGST

It is thus humbly submitted that the Council must exclude the scenarios where there will be no balances left after the utilization from the application of the new system. Done otherwise shall be grossly unjust for the tax payers as that will lead to increase in the blockage of funds.

b) Ad hoc allocation of the unallocated IGST shall largely solve the problem. Imposing burden on the tax payers to bear the cost of the problem not invented by them is unfair.

c) The amendments in question are also open to a legal challenge under Article 14 of the Constitution of India on the grounds that the same is arbitrarily and discriminately applied to all the class of suppliers.

d) The amendments in question are also open to a legal challenge under Article 19(1)(g) of the Constitution of India on the grounds that the same imposes unreasonable restrictions in carrying out trade or business.

10. Author thus hopes that the Council in its wisdom realizes the above referred concerns and addresses the same at the earliest.

(Views are strictly personal)

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June 2021