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Effective March 29, 2019, the government revised the set-off order for Input Tax Credits (IGST), aiming to optimize revenue sharing between the central and state governments. However, if not understood or applied correctly, these changes could lead to increased working capital needs for businesses. To mitigate this, it's crucial to comprehend the new set-off order, optimize IGST utilization, and assess the potential impact on operations.
Following the implementation of Rule 88A, the priority for utilizing input tax credit (ITC) will be determined by the numerical sequence outlined below:
| Type of ITC | Order of Utilization |
|---|---|
| Integrated Tax Credit (ITC) | 1. Payment of Integrated Tax (IGST) |
| 2. Payment of Central Tax (CGST) | |
| 3. Payment of State Tax (SGST) or Union Territory Tax (UTGST) | |
| Central Tax Credit (CGST) | 1. Payment of Central Tax (CGST) |
| 2. Payment of Integrated Tax (IGST) | |
| State Tax Credit (SGST) or Union Territory Tax Credit (UTGST) | 1. Payment of State Tax (SGST) or Union Territory Tax (UTGST) |
| 2. Payment of Integrated Tax (IGST) |
Introduced by Notification No. 16/2019-Central Tax on March 29, 2019, Rule 88A established a new priority for ITC utilization. Effective April 1, 2019, it mandated that IGST ITC be initially used to settle IGST liabilities. Any surplus could then be applied to CGST or SGST/UTGST payments. Additionally, CGST, SGST, or UTGST ITC could only be used after exhausting IGST ITC.
Part of the CGST (Amendment) Act, 2018, these sections were introduced on February 1, 2019. Section 49A reinforced the IGST-first principle, requiring CGST, SGST, or UTGST ITC to be used only after fully utilizing IGST ITC. Section 49B granted the government the authority to prescribe the order and method of ITC utilization for IGST, CGST, SGST, or UTGST payments, subject to the Council's recommendations.
The following example, as given in the circular, further explains the impact of the newly introduced Rule 88A of the CGST Rules regarding the offset of ITC:
Input Tax Credit (ITC) available and output liability under various tax heads:
Sure!
| Description | Input | Output |
|---|---|---|
| Head Output Liability | 1000 | 1300 |
| Central tax | 300 | 200 |
| State tax / Union Territory tax | 300 | 200 |
| Total | 1600 | 1700 |
Note: The options below are provided for illustrative purposes only. You may choose any option and adjust the proportion of IGST utilization against CGST and SGST liability to optimize ITC use, aiming to minimize cash liability after the set-off.
Option 1: Default Offset Functionality on GST Portal
If the remaining IGST ITC is used first against the output CGST liability.
| Particulars | Total ITC | Output IGST | Output CGST | Output SGST | ITC Used | Balance ITC | Output Tax Liability |
|---|---|---|---|---|---|---|---|
| Total | ₹1,300 | ₹1,000 | ₹300 | ₹300 | ₹0 | ₹100 | |
| Less: ITC Used | ₹1,200 (₹1,000+₹200+₹200) | ||||||
| Balance Output Liability (Cash) | ₹0 | ₹0 | ₹100 |
Remarks: Option 1 is not ideal, as ITC of CGST cannot be utilized against SGST, resulting in ₹100 cash liability under SGST and unutilized ₹200 ITC under CGST.
Note: IGST ITC has been fully used before applying CGST and SGST ITC.
Option 2: Equal Utilization of IGST ITC
If the remaining IGST ITC is distributed equally between CGST and SGST liabilities.
| Particulars | Total ITC | Output IGST | Output CGST | Output SGST | Balance ITC | Output Tax Liability |
|---|---|---|---|---|---|---|
| Total | ₹1,300 | ₹1,000 | ₹300 | ₹300 | ₹0 | |
| Less: ITC Used | ₹1,200 (₹1,000+₹150+₹150+₹50+₹50) | |||||
| Balance Output Liability (Cash) | ₹0 | ₹0 | ₹0 |
Remarks: Option 2 is more favorable than Option 1, as IGST ITC is utilized equally for both CGST and SGST, resulting in no cash liability, with ₹50 unutilized ITC in both CGST and SGST.
Note: IGST ITC has been completely used before utilizing CGST and SGST ITC.
Option 3: Custom Utilization (2:1 Ratio)
If the remaining IGST ITC is used in a 2:1 ratio for CGST and SGST, respectively.
| Particulars | Total ITC | Output IGST | Output CGST | Output SGST | Balance ITC | Output Tax Liability |
|---|---|---|---|---|---|---|
| Total ITC | ₹1,300 | ₹1,000 | ₹300 | ₹300 | ₹1,300 | ₹0 |
| Less: ITC Used (IGST) | ₹1,000 | ₹1,000 | ₹0 | ₹0 | ₹300 | ₹0 |
| Less: ITC Used (CGST) | ₹200 | ₹0 | ₹200 | ₹0 | ₹100 | ₹0 |
| Less: ITC Used (SGST) | ₹200 | ₹0 | ₹0 | ₹200 | ₹0 | ₹0 |
| Balance Output Liability (Cash) | ₹0 | ₹0 | ₹0 | ₹0 | ₹0 |
Remarks: While Option 3 eliminates cash liability, ₹100 remains unutilized under CGST, as CGST ITC cannot offset SGST liabilities.
Note: IGST ITC has been completely used before utilizing CGST and SGST ITC.
Rule 88A was introduced to ensure that the IGST credit is fully utilized before using CGST and SGST credits. This helps in optimizing the distribution of tax credits between the central and state governments.
If IGST credit is not fully utilized, it cannot be used for CGST or SGST/UTGST liabilities. The taxpayer must first exhaust the IGST credit before using any other credits.
Yes, recent updates include amendments to various sections of the CGST Act, such as Section 16, which now requires buyers to pay their suppliers within 180 days to claim ITC. Other updates include changes to Sections 37, 39, 44, and 52, which restrict the filing of certain GST returns after three years from the due date.
Businesses can optimize their ITC utilization by carefully planning the use of IGST credits first and then using CGST and SGST credits in a way that minimizes their cash outflow.
