Central and State Legislatures during 2018 had passed amendments vide CGST (Amendment) Act, 2018, IGST (Amendment) Act, 2018, respective SGST (Amendment) Act, 2018 and UTGST (Amendment) Act, 2018. These amendments have been made effective from 1st February 2019.
One of the amendments pertain to sequence of utilisation of ITC, vide Section 49A of CGST / SGST Acts, which specify that:
“Notwithstanding anything contained in section 49, 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 towards such payment.”
Though the intention of this change is to ‘rationalise’ the manner of utilisation of input tax credits, this can also imply that in certain situations tax payers must pay additional tax inspite of input credits being available. This would especially impact those businesses who have higher inter-state procurements and intra-state sales.
Lets understand this through the following example:
Before the amendment, utilisation was allowed as follows:
Effective 1st February, IGST will have to be fully utilised first, and then respective CGST and SGST credits are allowed to be utilised as follows:
As we may observe, the net tax payable in cash has increased from 200 to 300 due to the amendment, and CGST credit is blocked to the tune of 100.
In a nutshell, as IGST credits are to be utilised before utilising CGST credit against CGST liability, CGST credits can get blocked for utilisation – as CGST credits are not allowed to be utilised against SGST liability.
This impact on cashflow must be noted by those businesses procuring more inter-state or by way of imports of goods/services and having higher intra-state sales.