How to Maximize ITC & Reduce Working Capital?

Understand the order of set off with GST Consultants or Udaipur CA to maximize your Input Tax Credit and lower your working capital requirements effectively

Order of Utilization of Input Tax Credit under GST

The government changed the procedure for the order of set-off of the same with effect from 29th March 2019. It is necessary to understand order of set off in view of maximum utilisation of ITC (Input Tax Credit)  and reduce the requirement of higher working capital.

The Amended Law on Order of ITC Set-Off

CGST Circular No. 98/17/2019 was issued on 23 April 2019 has clarified the order of ITC utilisation for each tax head. It was also clarified that till the Rule 88A of the CGST Rules, implemented on the GST portal, taxpayers had to follow the facility available on the GST portal up to July 2019.

Utilization of ITC before April 1, 2019

(After the introduction of Section 49A and 49B)

 Section 49A: Utilisation of input tax credit

Notwithstanding anything contained in section 49, 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 towards such payment. 

Section 49B: Order of utilisation of Input Tax Credit

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 utilisation 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”.

Thus the order of utilization of ITC as per section 49A and 49B

ITC Available	First Set off (Output Liability)	Next Set off (Output Liability)	Not allowed to Set off	Impact of Section 49A and 49B
IGST	IGST	CGST first followed by SGST/UTGST	NA	IGST credit is to be utilised first against IGST liability then CGST liability and then SGST/UTGST liability.
CGST	IGST	CGST	SGST and UTGST
SGST	IGST	SGST	CGST
UTGST	IGST	UTGST	CGST

Thereafter, the rule 88A has been inserted to notify the above new provision via CT notification no. 16/2019 dated 29th March 2019. 

Rule 88A: Order of utilisation of input tax credit:- 

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.

The newly inserted rule 88A in the CGST Rules allows utilisation of input tax credit of integrated tax towards the payment of Central tax and State tax, or as the case may be, Union Territory tax, in any order subject to the condition that the entire input tax credit on account of integrated tax is completely exhausted first before the input tax credit on account of Central tax or State/Union Territory tax can be utilised.

It is clarified that after the insertion of the said rule, the order of utilisation of input tax credit will be as per the order (of numerals) given below:

ITC Available	First Set off (Output Liability)	Next Set off Output Liability)	Not allowed to Set off	Impact of Rule 88A and related Proviso
IGST	IGST	CGST/SGST/UTGST (in any order)	NA	IGST credit is to be utilised first against IGST liability then against CGST/SGST/UTGST liability in any order.   Taxpayer has to exhaust ITC of IGST first followed by CGST/SGST/ UTGST credit.   IGST liability will be settled off first compulsory.
CGST	IGST	CGST	SGST and UTGST
SGST	IGST	SGST	CGST
UTGST	IGST	UTGST	CGST

With the new rules in place, it is mandatory to utilize the entire IGST available in electronic credit ledger before utilizing ITC on CGST or SGST. The order of setting off ITC of IGST can be done in any proportion and any order towards setting off the CGST or SGST output after utilizing the same for IGST output. 

Stay informed with GST Consultants or Udaipur CA about GST about the updated GST set-off procedure effective from 29th March 2019. Maximize ITC utilization and manage working capital efficiently .