Utilization of Input Tax Credit under GST

Under the Goods and Services Tax (GST) regime, input tax credit (ITC) is a mechanism that allows businesses to offset the tax they have paid on inputs (i.e., raw materials, goods, or services) against the tax liability on output supplies (i.e., sales of goods or services). The utilization of input tax credit is a fundamental aspect of GST compliance and plays a crucial role in reducing the tax burden on businesses.

📜 GST Circular No. 98/17/2019-GST: Understanding Input Tax Credit Utilization

Circular No. 98/17/2019-GST

🔍 Background: The Goods and Services Tax (GST) system in India involves the utilization of input tax credit (ITC) for discharging tax liabilities. Circular No. 98/17/2019-GST, issued on 23rd April 2019, provides clarity on the order of ITC utilization under GST.

📌 Issue Faced by Taxpayers: Before the implementation of Rule 88A of the Central Goods and Services Tax Rules (CGST Rules), taxpayers encountered challenges due to the introduction of Section 49A of the Central Goods and Services Tax Act, 2017 (CGST Act). This section impacted the order in which ITC could be used for different types of taxes.

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📝 Key Points Clarified by the Circular:

1. Section 49A of the CGST Act:
   • This section mandates that Integrated tax (IGST) credit must be fully utilized before utilizing Central tax (CGST) or State tax (SGST) credit for tax payment.
   • The order of utilization is: IGST → CGST → SGST/UTGST.

M/s XYZ is a company registered under GST. It has an output liability of ₹3,100 and Input Tax Credit available in the Credit Ledger A/c is ₹3,200 in the below mentioned order.

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit	1800	700	700

Order of Utilization of IGST Credit

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit IGST	1500	300
Input Tax Credit CGST		500
Input Tax Credit SGST/UTGST			700
GST Payable			100
Balance ITC	NIL	200	NIL

2. Challenge Faced by Taxpayers:
   • In certain cases, taxpayers had to pay one type of tax (e.g., SGST) through the electronic cash ledger, while the ITC for another type of tax (e.g., CGST) remained unutilized in the electronic credit ledger.
3. Rule 88A of the CGST Rules:
   • To address this issue, Rule 88A was inserted in the CGST Rules.
   • It allows the utilization of IGST credit for payment of CGST and SGST/UTGST in any order.
   • However, the entire ITC on account of IGST must be exhausted first before using ITC for CGST or SGST/UTGST.

CASE 1: When out of available IGST Credit of ₹1800, excess IGST Credit after adjusting the IGST Output liability is utilized in the following manner i.e., ₹ 200 towards CGST &  ₹100 towards SGST/UTGST.

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit	1800	700	700

Order of Utilization of IGST Credit

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit IGST	1500	200	100
Input Tax Credit CGST		600
Input Tax Credit SGST/UTGST			700
GST Payable
Balance ITC	NIL	100	NIL

CASE 2: When out of available IGST Credit of ₹1800, excess IGST Credit after adjusting the IGST Output liability is utilized in the following manner i.e., ₹ 100 towards CGST &  ₹200 towards SGST/UTGST.

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit	1800	700	700

Order of Utilization of IGST Credit

Particulars	₹ IGST	₹ CGST	₹ SGST/UTGST
Output Liability	1500	800	800
Input Tax Credit IGST	1500	100	200
Input Tax Credit CGST		700
Input Tax Credit SGST/UTGST			600
GST Payable
Balance ITC	NIL	NIL	100

4. Revised Order of ITC Utilization: After the introduction of Rule 88A, the order of ITC utilization is as follows:
   • Step 1: Utilize ITC of IGST completely.
   • Step 2: Utilize ITC of CGST or SGST/UTGST (in any order).