NEW DELHI: Federal indirect tax body, the Goods and Services Tax (GST) Council, has removed the limits placed on companies from February this year on settling their tax liability with credits for taxes paid previously on raw materials and services. The move comes after businesses said the restrictions have led to an increase in their tax outgo.
In a clarification issued to field officers on Tuesday, the Central Board of Indirect Taxes and Customs (CBIC) granted full flexibility to businesses in using the credits for taxes paid on inter-state transactions (integrated GST or IGST) in settling the liability towards GST payable to Union or state governments.
The limits introduced from February had forced companies to use IGST credits in a certain order that limited their ability to manage their final tax outgo with the tax credits available on the ledger. This, companies have claimed, led to increased cash outgo in certain scenarios to meet their tax liability while unused tax credits remained on their books.
CBIC said credits from paying taxes on interstate transactions (for raw materials and services) can be used for setting off the GST liability to central or state governments in any order or in any proportion. The only rider is that if finished goods move across state borders, the IGST credit should first be utilized for settling that liability and the surplus could be utilized for meeting the tax liability towards central or state GST.
The GST Council introduced the restrictions in February as IGST credit remaining on records was going up, which the tax authorities wanted companies to use up. Experts said the latest clarification offered relief to companies. “This was a much needed clarification, as this should help bring to rest the varied interpretations apprehended by industry experts on the utilization of IGST credit," said Abhishek Jain, tax partner, EY.
Restrictions on the use of tax credits were impacting big companies as they have a vast value chain across states and have large amounts of input tax credits on their ledger on account of transactions across state borders.
The flexibility to use credits from inter-state transactions is a relief for businesses as it is more fungible and can be utilized for meeting tax liability to Union or state tax authorities. On the other hand, credits from CGST and SGST payment cannot be cross-utilised.
“The clarification issued on the GST credit utilisation matter is a positive development and addresses the issue," said a spokesperson for consumer goods producer Hindustan Unilever Ltd.
GST comprises two equal components--the central GST that goes to the union government and State GST, which goes to the respective state or union territory. The new indirect tax system seeks to levy tax at every stage of the supply chain only to the extent of value added at that stage by giving credit for taxes paid in the previous stage. This has the advantage over the earlier system in avoiding cascading of taxes or the phenomenon of tax on tax.
In a separate notification issued on Tuesday, CBIC disallowed businesses from generating e-way bills or electronic permits needed for transportation of goods if they do not file tax returns for two months, with effect from 21 June. In the case of small businesses who file tax returns every quarter, the restriction will apply if they do not file returns for two consecutive quarters.