The amendments to central and state GST laws made in 2018 and brought into effect from February 2019 have the unintended consequence of certain tax credits getting piled up without getting used for meeting the final tax liability of businesses, they said.
The amendments prescribe the order in which credits for past payment of various components of GST can be adjusted against the tax liability on the final output of a business. The new norms restrict using credits for central and state components of GST (CGST and SGST) unless credits for taxes paid on inter-state transactions are fully used.
GST involves two equal components on any transaction—Central and state GST—that go to the respective governments. Inter-state supplies attract integrated GST (IGST), which is eventually apportioned between the union and state governments.
According to the new norms, credit for IGST has to be exhausted before using credit for central or state GST paid in the past for meeting CGST and SGST liability, respectively.
This, in many cases, leads to a situation where the more flexible IGST credit is used up for paying CGST liability fully, forcing businesses to pay at least part of SGST liability in cash. It takes away the flexibility in utilization of tax credits.
Unlike credits for IGST, the same for CGST and SGST can’t be cross-utilised. This results in tax payment in cash while tax credits remain on the books of the company.
Experts said that although unintentional, the move is pinching businesses.
“This amendment has become a point of worry for most industry players as they may now have to pay SGST liability in cash even in scenarios where prior to this amendment it could be paid by utilizing credits. What led to this is the introduction of this new rule of utilization of IGST credit," said Abhishek Jain, tax partner, EY.