GST Credit Utilisation: Partial Input Tax Credit Relief For Businesses

In a partial reprieve for companies and their dealers, especially in the consumer durables and auto sectors, the government eased rules on utilisation of input tax credit under the Goods and Services Tax.

The order in which input tax credit could be used to set-off GST liability was changed starting Feb. 1. It was mandated that to set-off GST liability on account of Integrated GST, State GST or Central GST, the input tax credit available on account of IGST must be utilised first. This was affected through insertion of Section 49A in the central GST law.

This requirement, read with the fact that input CGST cannot be used to discharge SGST liability and vice versa, created cash flow issues for companies.

When GST was implemented, many businesses had an opening CGST credit on their books from the excise and service tax regime, Pratik Jain, partner at PwC, said. That credit, he said, could only be used to discharge CGST liability since it was a central tax. So, if businesses already had a balance of input CGST to use against output CGST, mandating that input IGST be exhausted by them to discharge CGST liability, led to unutilised input CGST and cash flow issues, Jain said.

Here's a simple illustration to explain this.

The issue of unutilised input CGST and SGST was also being faced by businesses who purchased goods from outside their state but sold within their state.

For instance, car dealers. A car dealer in Gujarat buying from a manufacturer in Maharashtra has to pay IGST since it's an inter-state transaction. The dealer, having paid this tax, would have input IGST on his books. The dealer will have some local purchases due to which he'll also have input CGST and SGST on his books.

The requirement that input IGST be exhausted first against any tax liability meant that some amount of input CGST and SGST remained unutilised.

What's The Relief?

This requirement, that input IGST be exhausted first, came into being due to concerns raised by several states that the allocation of IGST revenue—which has to be split between the central government and states—is not happening in a timely manner, Waman Parkhi, partner at KPMG India, said. So the idea was to reduce the available IGST credit so that the settlement between the centre and states becomes easier, he added.

That explains why, despite the amendment, the requirement that input IGST be exhausted first has not changed even now. The relief is in the order of using the balance input IGST once IGST liability has been paid. The balance input IGST can now be used either against CGST or SGST liability, in whichever order a business wants to. To reiterate, earlier this balance input IGST had to be first used to discharge CGST liability.

Jain, however, said this is only a partial relief since input IGST still has to be exhausted first. Businesses had made representations to say that the government should not mandate the order of utilisation of input tax credit i.e. businesses should be allowed to use input tax credit on their books against integrated, central or state GST liability in whatever order they wish to, he said.