This is an update on a recent amendment of the CGST Rules, vide N/N. 16/2019 – Central Tax, dated 29 March 2019. One of the important amendments pertains to insertion of Rule 88A: Order of utilization of input tax credit (ITC).
The present amendment is integrally linked to the amendment in the CGST Act, 2017, which was effective from 1 February 2019. A brief overview of such previous amendment and the impact of the introduction of Rule 88A is provided below:
- Previous amendment effective 1 February 2019
As you must be aware, two new Sections (Sections 49A and 49B), relating to utilisation of ITC, were introduced in the CGST Act, 2017, with effect from 1 February 2019. These Sections provide the following:
Section 49A: Entire credit balance of IGST shall be utilised against output liability of IGST, CGST & SGST / UTGST before utilization of balance under CGST & SGST / UTGST. Hence, before utilization of CGST & SGST credit for settling output liability, a tax payer needs to completely utilize credit available under IGST. (Prior to this amendment, output liability was settled first through intra-head adjustment, on account of IGST, CGST & SGST and balance, if any, was cleared via inter-head adjustment, as prescribed.)
Section 49B: Provides that, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of ITC on account of IGST, CGST & SGST, towards payment of output tax liability.
The introduction of Section 49A, read with Section 49(5) leads to a possible situation where the taxpayer had ITC under one head (CGST) and had to make cash payment under the other tax head (SGST). This situation could be explained with the help of the following example:
Illustration
In case the taxpayer has an available ITC of 60, each under CGST and SGST, and 50 (under IGST), and the liability of the client is 80 each under CGST and SGST, the payment of liability in both, pre-amendment and post-amendment scenario is illustrated below:
Pre-amendment scenario Balance of ITC
| Tax type | Liability | Paid through | To be paid in cash | Particulars | IGST | CGST | SGST | ||||
| IGST | CGST | SGST | |||||||||
| IGST | – | – | – | – | – | Opening Balance | 50 | 60 | 60 | ||
| CGST | 80 | 20 | 60 | – | – | Less: Utilized | 40 | 60 | 60 | ||
| SGST | 80 | 20 | – | 60 | – | Closing balance | 10 | 0 | 0 | ||
Post amendment (February 1) scenario Balance of ITC
| Tax type | Liability | Paid through | To be paid in cash | Particulars | IGST | CGST | SGST | |||
| IGST | CGST | SGST | ||||||||
| IGST | – | – | – | – | – | Opening Balance | 50 | 60 | 60 | |
| CGST | 80 | 50 | 30 | – | – | Less: Utilized | 50 | 30 | 60 | |
| SGST | 80 | – | – | 60 | 20 | Closing balance | 0 | 30 | 0 | |
In the abovementioned illustration, post amendment of February 1, it is evident that, the taxpayer has to pay INR 20 in case, despite having ITC under another tax head, leading to working capital blockage. This problem is sought to be resolved though the present amendment, by way of introduction of Rule 88A under the CGST Rules.
- Introduction of Rule 88A
Rule 88A states that:
“Input tax credit on account of integrated tax shall first be utilised towards payment of integrated tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order, Provided that 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.
With the introduction of Rule 88A, it has been provided that, the IGST credit can be utilised against CGST / SGST/ UTGST in any order, thereby, removing the inefficiency from blockage of working capital. The application of above Rule in the abovementioned example is illustrated below:
Post Rule 88A Balance of ITC
| Tax type | Liability | Paid through | To be paid in cash | Particulars | IGST | CGST | SGST | |||
| IGST | CGST | SGST | ||||||||
| IGST | – | – | – | – | – | Opening Balance | 50 | 60 | 60 | |
| CGST | 80 | 30 | 50 | – | – | Less: Utilized | 50 | 50 | 60 | |
| SGST | 80 | 20 | – | 60 | – | Closing balance | 0 | 10 | 0 | |
As is evident, after introduction of Rule 88A, no tax is required to be paid due to efficiency in allocation of IGST, thereby, resolving the issue of working capital blockage due to this reason
