New mechanism can lead to accumulation of CGST credits and, in some cases, cash payment towards output SGST liability
GST is all set to mark 2nd anniversary in four months from now. Described as a ‘good and simple tax’, GST marks a fundamental shift from the way businesses were being done earlier. As the GST journey progressed, there was a growing realisation of its far-reaching impact. Industry faced various challenges, ranging from new and unique concepts, complex documentation, the high tax rates of certain goods and services to complex or unclear treatment of several common transactions. An important area under this new tax regime that benefited the industry the most in almost every segment is free flow of credits.
Unlike erstwhile indirect tax regime, where restricted credits were available to trading and services industry, GST brought a level-playing field for the entire community irrespective of the category of the industry, be it manufacturing, services or trading. Apart from extended credit base (barring few restrictions), the unique offset methodology as covered under section 49(5) of the Central GST Act made the credits fully fungible irrespective of the nature of the credit.
As per section 49(5) of the CGST Act, the IGST credit, which arises on account of interstate procurements or imports from outside India or procurements from SEZs, was allowed to be used for payment of CGST and SGST output liability once the input credit on account of input CGST and SGST credit was fully utilised. This method allowed companies to utilise the credits to its fullest and cash payouts were required only when the credits are fully exhausted.
The tax payment utility available on the government portal was customised to offset the SGST credit first with the SGST output liability and likewise the CGST credit was first allowed to set off against the CGST output liability. Once the SGST and CGST input balances are fully utilised for payment of respective output taxes, the IGST credit balance was allowed to be used towards the payment of CGST and SGST output liability in chronological order.
Recently, the government amendment the set-off mechanism of input tax credit to be effective from February 1, 2019. As per the amended set-off mechanism, which is covered under section 49A of the CGST Amendment Act 2018, a GST registered person is required to first utilise its entire IGST credit towards the payment of output IGST liability. The balance of IGST credit will then be used for payment of CGST and SGST liability, respectively. The credit balance available in the SGST and CGST credit pool can be used only when the IGST credit pool is fully utilised. The accompanying table shows the erstwhile set-off mechanism which was operational till January 31, 2019, and the revised set-off mechanism effective February 1, 2019.
The revised set-off mechanism is applicable for utilisation of credit available on/after February 1, 2019. This means that taxpayers were required to follow the new mechanism while filing their GST 3B for the month of February, which was due on March 20, 2019. While it seems the new set-off mechanism has been prescribed to minimise the fund settlement amongst central and state governments on account of IGST, the amendment has created an anomaly wherein credit of CGST will get accumulated and SGST output liability will have to be discharged in cash in certain cases.
The importers and companies having interstate procurement model have CGST credit balances lying in their credit pool as on date. A large chunk of credit was transitioned from the erstwhile tax regime through Tran-1. This segment of companies that are heavily reliant on imports or interstate procurements, such as retail stores, may be hit with this new offset mechanism. This will have significant working capital impact to such taxpayers.
The new set-off mechanism is going to result in accumulation of CGST credits and in some cases cash payment towards output SGST liability. Taxpayers whose local procurements are more than interstate procurements will remain unaffected with the new mechanism.
Also, taxpayers enjoying state incentives where the benefits are linked to payment of SGST (either in cash or through SGST credit) will suffer with this new set-off procedure. For companies with high interstate procurements, with combined credit of IGST and CGST exceeding total liability of IGST and CGST, the new set-off mechanism is going to create challenge in terms of accumulation of CGST credit balance and at the same time cash payout towards SGST liability.
The new set-off mechanism which is already effective will disrupt the fundamental advantage of fungibility of credits. No ability of set-off the available credits can in one way be viewed as tax on tax or cascading of taxes which was the challenge under the erstwhile tax regime.
India Inc expects the government to reconsider these aspects and take course correction or as an alternate companies may need to consider to alter their supply-chain models (move from centralised distribution model to decentralised distribution model) to achieve efficiencies. However, any alternate arrangement at the end of India Inc could lead to various other nuisances such as supply-chain realignment, redefining IT systems to cater to new features, contract disruptions and much more.
(Kishore Kumar, director, and Anubha Aggarwal, associate, contributed to the article.)