New GST input credit adjustment mechanism w.e.f. 01.02.2019 - explained with simple illustration

New GST input credit adjustment mechanism w.e.f. 01.02.2019

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

The relevant extract of the new provision are reproduced here under:

49A. Notwithstanding anything contained in Section 49 the input tax credit on account of central tax, State tax or Union territory tax shall be utilized 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 utilized fully towards such payment.

49B. The Government may, on the recommendations of the Council, prescribe the order and manner of utilization of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax

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
SGST	IGST	SGST
CGST	IGST	CGST
IGST	IGST	CGST and SGST

Change and impact

The new amendment in the manner of taking audit will impact the working of taxpayers 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 taxpayers 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.  This adverse impact is illustrated by way of the following example.

Example:

Let us suppose the following figures for filing the GSTR – 3B (INR)

	Tax Liability	Input Tax Credit
IGST	200	400
SGST	200	100
CGST	200	100

The Input tax credit shall be availed w.e.f. 01.02.2019 as follows:

(INR)

	ITC Available	IGST	CGST	SGST	To be paid by Cash Ledger
	Tax liability	(400)	(100)	(100)
IGST	200	200	-	-	-
CGST	200	200	-	-	-
SGST	200	-	-	100	100
ITC Balance		-	100	-	-

As can be seen, that the amount is not different in both the cases. But the tax of the SGST should be paid from the cash ledger even when there is credit in the CGST head. ₹ 100 is to paid 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. 1^st 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 can’t use such input tax credit unless the IGST has been fully exhausted.