Notification No. 16/2019, dated 29-3-2019 has brought the new order of ITC utilization – rule 88A. This can be seen as a relief to the business community as they had anticipated an increase in there working capital requirements due to blockage of credit by the amendment made to section 49 in the First Amendment Act, 1st Feb 2019. Below we analyze the changes in the ITC utilization as per new rule 88A by the power conferred on the government as per section 49 B.
Rule 88A Order of utilization of input tax credit
Input tax credit (on account of integrated tax) will be first utilized towards payment of integrated tax. The amount remaining, if any, will be utilized towards the payment of central and State tax or Union territory tax.
| Liability | IGST | CGST | SGST/UGST | Remarks |
| ITC-IGST | 1st | 2nd/3rd | 2nd/3rd | IGST liability will be settled off first compulsory and then free to use IGST Input in payment of the CGST or SGST/UGST liability in any order. |
As per the Amendment Act the order of utilization after the set-off of IGST liability was compulsory CGST and then SGST/UGST. Now the order has been relaxed in case of either CGST or SGST/UGST liability can be set off.
Provision to Rule 88A
The input tax credit on account of Centra, State 0r Union territory tax will be utilized for the payment of integrated tax, Central tax, State tax or Union territory tax only after the input tax credit has first been utilized fully on account of integrated tax.
| Liability | IGST | CGST | SGST/UGST | Remarks |
| ITC -IGST | 1st | 2nd/3rd | 2nd/3rd | ITC of IGST to be exhausted first then only ITC of CGST or SGST/UGST can be utilized for respective payments. |
| ITC- CGST | 2nd | 1st | X | |
| ITC- SGST | 2nd | X | 1st | The credit of SGST/UGST will be utilized for the payment IGST only when there is no other ITC available. |
Illustrative examples
| Old set-off rules-prior to an amendment to section 49 | New set-off rules (After First Amendment Act) | Latest set-off (After insertion of Rule 88A) | |||||||||
| Old set-off rules | IGST | CGST | SGST | New set-off rules (After First Amendment Act) | IGST | CGST | SGST | Latest set-off (After insertion of Rule 88A) | IGST | CGST | SGST |
| Output liability | 500 | 500 | 500 | Output liability | 500 | 500 | 500 | Output liability | 500 | 500 | 500 |
| Input credit (including opening) | 750 | 350 | 350 | Input credit (including opening) | 750 | 350 | 350 | Input credit (including opening) | 750 | 350 | 350 |
| The priority of utilization: | The priority of utilization: | The priority of utilization: | |||||||||
| Intra head credit utilization | -500 | -350 | -350 | Inter head credit utilization | -500 | -250 | 0 | Inter head credit utilization | -500 | -150 | -100 |
| Inter head credit utilization | -150 | -100 | – Utilized from | IGST | – Utilized from | IGST | |||||
| – Utilized from | IGST | IGST | Intra head credit utilization | -250 | -350 | Intra head credit utilization | -350 | -350 | |||
| Balance Input credit | 0 | 0 | 0 | Balance Input credit | 0 | 100 | 0 | Balance Input credit | 0 | 0 | 0 |
| Payable | 0 | 0 | 50 | Payable | 0 | 0 | 150 | Payable | 0 | 0 | 50 |
* Note:- Figures in INR
The above comparison under different provisions clearly points out that the earlier position of set-off under earlier section 49 (before Amendment Act) has been restored by the new rule 88A.
In the above example, the use of IGST credit after set-off of IGST liability is used both for CGST and SGST liability in a ratio so as to have the only single liability of SGST and minimize cash payment.
Can the IGST credit after utilization of IGST liability be utilized partly from CGST or SGST?
As per the rule 88A -“integrated tax shall first be utilized towards payment of integrated tax, and the amount remaining, if any, may be utilized towards the payment of Central and State tax or Union territory tax”. It neither mentions that balance IGST can be utilized partly from CGST or SGST nor prohibits it.
If there is prohibition in part utilization, it will be as follows:
| New set-off rules (After First Amendment Act) | On Assumption that there is prohibition in part utilization | ||||||||||
| Latest set-off (After insertion of Rule 88A)- Fully Utilisation in SGST | Latest set-off (After insertion of Rule 88A) Fully Utilisation in CGST | ||||||||||
| New set-off rules (After First Amendment Act) | IGST | CGST | SGST | Latest set-off (After insertion of Rule 88A) | IGST | CGST | SGST | Latest set-off (After insertion of Rule 88A) | IGST | CGST | SGST |
| Output liability | 500 | 500 | 500 | Output liability | 500 | 500 | 500 | Output liability | 500 | 500 | 500 |
| Input credit (including opening) | 750 | 350 | 350 | Input credit (including opening) | 750 | 350 | 350 | Input credit (including opening) | 750 | 350 | 350 |
| The priority of utilization: | The priority of utilization: | The priority of utilization: | |||||||||
| Inter head credit utilization | -500 | -250 | 0 | Inter head credit utilization | -500 | 0 | -250 | Inter head credit utilization | -500 | -250 | 0 |
| – Utilized from | IGST | – Utilized from | IGST | – Utilized from | IGST | ||||||
| Intra head credit utilization | -250 | -350 | Intra head credit utilization | -350 | -250 | Intra head credit utilization | -250 | -350 | |||
| Balance Input credit | 0 | 100 | 0 | Balance Input credit | 0 | 0 | 100 | Balance Input credit | 0 | 100 | 0 |
| Payable | 0 | 0 | 150 | Payable | 0 | 150 | 0 | Payable | 0 | 0 | 150 |
* Note:- Figures in INR
Going by the above assumption that the part utilization will not be allowed by the system in absence of clarity, we may observe the liability of the recipient will not be affected even after the introduction of Rule 88A. In all the three comparisons liability will remain the same, Rs. 150 and there will be no relief.
We believe that part utilization of IGST credit will be allowed. Therefore, the burden of the supplier will be reduced from Rs. 150 to Rs. 50. But it will get clearer once the actual return filling with new rule starts on the portal.