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October 1, 2022

Know all about updated ITC set off rules under GST Law

by CA Shivam Jaiswal in GST

Know all about updated ITC set off rules under GST Law

What is input tax credit ?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount. When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a producer

a. Tax payable on output (FINAL PRODUCT) is Rs 900
b. Tax paid on input (PURCHASES) is Rs 700
c. You can claim INPUT CREDIT of Rs 700 and you only need to pay GST tax of Rs 200.

From 1st January 2021, certain taxpayers cannot utilise the ITC balance available in the electronic credit ledger to discharge more than 99% of the tax liability for a tax period. It means atleast 1% of tax liability must be paid by cash. The government has amended the CGST Act 2017 vide CGST Amendment Act 2018, one of the most important changes is the new ITC set off rules in GST notification, new order to set-off GST credit, w.e.f 1st February 2019. According to this new rule, IGST credit set off rules shall be fully utilized before utilizing the credit of CGST and SGST.

Rules of Set Off

Payment for1st set off from2nd set off
IGSTIGSTCGST and SGST
CGSTIGSTCGST
SGSTIGSTSGST

Utilization of IGST’s Input Tax Credit under GST

The Input Tax Credit under Goods and Service Tax of IGST shall be

  • first utilized towards payment of IGST;
  • then towards the payment of output CGST;
  • and then towards the payment of output SGST

Utilization of CGST’s Input Tax Credit under GST

The Input Tax Credit under Goods and Service Tax of CGST shall be

  • first utilized towards the payment of output CGST
  • and then towards the payment of output IGST
  • However, Input Tax Credit under Goods and Service Tax of CGST can’t be used to adjust SGST.

Utilization of SGST’s Input Tax Credit under GST

The Input Tax Credit under Goods and Service Tax of SGST shall be

  • first utilized towards the payment of output SGST;
  • and then towards the payment of output IGST
  • However, Input Tax Credit under Goods and Service Tax of CGST can’t be used to adjust CGST.

Effect of GST Set Off Rules on Businesses

There can be 5 cases (GST set off rules 2022) depending upon the nature and transaction of the business

  • IGST set off rules latest 2022, the purchase and sale both are interstate then there will be no impact on the business.
  • When the purchase is interstate & intrastate and sale is intrastate then in such case CGST credit will accumulate that can be carried forward to the next month. Along with this, there will be an increase in SGST liability (which has to be paid in cash)
  • If the purchases are intrastate and sales are Interstate then there will be no impact on the business.
  • When the sales and purchases both are intrastate then there will be no impact on the business.
  • If a business purchases and sales the good or/and services interstate and intrastate then the credit of CGST will accumulate (carry forwarded to the next month). In addition to this SGST output liability of the business will increase (which has to be paid in cash).

Let us learn this with detailed example:

ParticularsIGSTCGSTSGSTTotal
Output (Tax paid on sales)2000200002000042000
Input Tax (Tax paid on purchase)22000120001200046000


Set-off

ParticularsIGSTCGSTSGSTTOTAL
Taxable Sales     2,000.00   20,000.00 20,000.00 42,000.00
Taxable Purchase   22,000.00   12,000.00 12,000.00 46,000.00
Gst payable(20000)     8,000.00   8,000.00 (4,000.00)
Set off against IGST towards CGST  (12,000.00)  
Set off against IGST towards SGST    (4,000.00) 
Total GST paid                 –                   –                  –                  –  
GST carry forward to next month    (4,000.00)   (4,000.00)

Effect: In the above example, the assesse hasn’t paid any tax and the balance credit of 4,000/-has been carried forward to next month.

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