GST Update | GST Input Tax Credit (ITC) Set Off New Rules | Section 49A and 49B

GST Update | GST Input Tax Credit (ITC) Set Off New Rules | Section 49A and 49B 

The government has amended CGST Act 2017 with various changes

w.e.f. 1^st Feb 2019 and one of the important change was made in Section 49 of CGST Act by introducing new section 49A & 49B after the section 49, which is as 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. Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub-section (5) of section 49, 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.”.

For detailed reading of section 49, please visit below link http://www.cbic.gov.in/htdocs-cbec/gst/index

However, few points of Section 49 are as below;

       
(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of–

(e) the central tax shall not be utilized towards payment of State tax or Union territory tax; and

(f) the State tax or Union territory tax shall not be utilized towards payment of central tax.

In other words, CGST and SGST can’t be cross utilized i.e. no input tax credit on account of CGST shall be utilized towards payment of SGST and vice versa.

GST ITC Set Off

Let us understand the above change in Tabular form along with an example and How exactly does this impact your Business;

Old Rule for GST ITC Set off is as under;

GST Components	First Set Off from	Then set off from
IGST	IGST	CGST & SGST/UTGST
CGST	CGST	IGST
SGST/UTGST	SGST/UTGST	IGST

New Rule for GST ITC Set off effective 1st February 2019 is as under (i.e. Applicable for GSTR3B for the month of February which is going to be filed in the month of March 2019 and onwards)

GST Components	First Set Off from	Then set off from
IGST	IGST	CGST & SGST/UTGST
CGST	IGST	CGST
SGST/UTGST	IGST	SGST/UTGST

So to conclude, the order of GST ITC set off will now start from IGST and then CGST and SGST/UTGST.

In other words, CGST and SGST/UTGST credit will be utilized only when we are not left with any credit in IGST bucket.

 Illustration

GST Components	IGST	CGST	SGST
Output Liability	1000	2000	2000
Input Credit	2000	2000	1000

Now we will apply both Old Rule and New Rule for computation of GST ITC set off and payment liability and will analyze how does it impact our working capital ?

First Applying Old Rule:

Particulars	Output Liability	ITC Available			Net Payable	ITC Carry Forward
		IGST	CGST	SGST
IGST	1000	1000	-	-	0	-
CGST	2000	-	2000	-	0	-
SGST	2000	1000	-	1000	0	-

We can see, as per Old Rule, First we have to pay IGST liability using IGST credit and then CGST/SGST. 

Further, CGST and SGST liability will be first set off from CGST and SGST respectively and then, if any  balance left, will be paid from IGST input.

Now Applying New Rule:

Particulars	Output Liability	ITC Available			Net Payable	ITC Carry Forward
		IGST	CGST	SGST
IGST	1000	1000	-	-	0	-
CGST	2000	1000	1000	-	0	1000
SGST	2000	-	-	1000	1000	-

We can see, as per New Rules, First we have to pay IGST liability using IGST input and then CGST/SGST. 

Further, CGST and SGST liability will be first set off from IGST input and then, if any  balance left, will be paid from CGST and SGST respectively.

From above it is clear that due to the applicability of New Rule of GST ITC set off, taxpayer is required to pay Rs.1000 from his pocket even though having sufficient balance in CGST. Hence, this will be going to impact the Working capital of your Business.

Thank you very much!

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