The concept of GST in India is structured as a multi-stage, destination-based tax levied at each stage of value addition in the supply chain. A very important feature of GST is the provision of “setoff” or input tax credit (ITC), which eliminates the issue of cascading of the same tax due to successive stages of the supply chain.
This is an essential aspect of GST where a business enterprise can claim credit on tax paid on purchases and other expenses against its tax liability. In this blog post, we will discuss the GST set off rules in detail along with a comparison of the new and old GST set off rules.
What is the Goods and Services Tax (GST)?
Goods and Services Tax is an all-encompassing indirect tax levied on the supply of goods and services in India. It has subsumed various indirect taxes like VAT, service tax, and excise duty. GST is levied at all stages of the supply chain, but all those additional costs are ultimately passed on to the consumer.
What are the GST Set Off Rules?
A very significant change in the current structure of management of ITC by businesses under GST has been brought in by the Central Board of Indirect Taxes and Customs (CBIC) with CGST Circular No. 98/17/2019. These new GST Set Off rules are designed to reduce the balances held in IGST credit and optimize the distribution between the Central and State Governments.
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What is Rule 88A?
Rule 88A of the Central Goods and Services Tax Rules, 2017, was enacted keeping in view the clarification required on the usage of ITC with respect to Integrated GST. It is constituted so as to render clarity on the order in which ITC could be applied to liability payments.
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What Does Rule 88A Say?
Rule 88A introduces a systematic way of utilizing ITC credits. It states that:
- ITC credits of IGST must first be used to pay off liabilities under IGST.
- Once IGST liabilities are cleared, any remaining IGST credit can be applied toward CGST and SGST/UTGST liabilities—in any order.
This structured approach ensures that businesses do not accumulate unutilized credits, which could increase their working capital needs.
What are the Key Changes in GST Credit Utilization?
The CGST (Amendment) Act introduces new provisions in Section 49 of the CGST Act:
- Section 49A: ITC available for the amount of CGST, SGST, or UTGST can be availed after the IGST credit has been fully exhausted.
- Section 49B: The government may, on the recommendation of the GST Council, prescribe the order of first utilization of ITC credit.
These amendments are designed to ensure that IGST credit is always used first, minimizing mismatches in tax settlements across states and the central government.
What is the GST Set Off Rule 88A in Practice?
Under Rule 88A, IGST credit must be exhausted before using credit under CGST or SGST/UTGST. This rule simplifies the entire process and also eases tax compliance.
Previous Set-Off Order (Before CGST Amendment):
- Set off IGST Liability first.
- Then use CGST or SGST credits.
New Set-Off Order (After CGST Amendment):
- Start with IGST Liability.
- Use IGST Credits first.
- Follow with CGST Credit, then SGST Credit.
- The remaining balance of CGST or SGST can then be set off using IGST Credit if available.
The new order will ensure that businesses utilize ITC to the maximum and do not let unutilized credit remain in their account thus improving business liquidity.
What is Rule 88D in GST?
Rule 88D in GST allows authorities to identify discrepancies between GSTR-1 and GSTR-3B returns. If mismatches are found, taxpayers receive a notice to explain or correct them. Failure to comply can lead to penalties.
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What is Rule 24 in GST?
Rule 24 in GST deals with the migration of existing taxpayers to the GST system. It outlines the process for registering those who were already registered under the previous tax regimes, ensuring a smooth transition to GST.
What is the Example of GST Set Off Rules in Action?
Let’s say you have:
- IGST Credit of ₹12,000,
- CGST Liability of ₹12,000,
- SGST Liability of ₹2,000.
According to the New GST Set Off Rules
The IGST credit can be fully adjusted against the SGST liability of ₹2,000 and part of the CGST liability of ₹10,000.
This will result in a balance CGST liability of ₹2,000, which will have to be paid out of pocket.
This example illustrates the use of IGST credit to reduce out-of-pocket expenses through efficient utilization by businesses to reduce tax payable.
If you want to know about more the GST Set Off rules then you can see this video below:
What is the Impact of New GST Set Off Rules on Businesses?
The new GST Set Off Rules ensure that taxpayers achieve an optimal balance in their tax settlement so that the full utilization of IGST credit is maximized.
This is particularly important for large businesses that are transacting high volumes across states, thereby reducing the storage of unutilized credit and also improving cash flow.
These rules also aim to better consolidate the equity between the Centre and the states on account of tax revenue.
What is the Comparison Between New GST Set Off Rules and Old GST Set Off Rules?
To better understand the comparison of new GST set off rules and old GST set off rules, we have provided detailed information about it in the table below:
| Aspect | Old GST Set Off Rules | New GST Set Off Rules |
|---|---|---|
| Order of Utilization | ITC credits could be utilized in any order for CGST and SGST | IGST credits must be fully utilized first before using CGST and SGST credits. |
| Focus on IGST Credit | No specific requirement for IGST credit utilization. | Requires complete utilization of IGST credits before using CGST or SGST credits. |
| Impact on Working Capital | Potential for higher working capital needs due to unutilized credits. | Optimized credit utilization reduces working capital requirements. |
| Compliance Complexity | Less structured; flexibility could lead to misuse of credits. | More structured approach increases compliance requirements but reduces misuse. |
| Impact on Inter-State Transactions | No specific focus on inter-state credit management. | Directly benefits businesses engaging in inter-state transactions by encouraging IGST utilization. |
| Reporting Requirements | Less emphasis on credit utilization order in filings. | Increased focus on credit utilization order in GST returns (e.g., GSTR-3B). |
| Business Sector Impact | General impact across sectors without specific adjustments. | Tailored impact based on sectoral transaction patterns, particularly for interstate suppliers. |
| Penalties for Misuse | Penalties for incorrect reporting but less focus on credit order. | Stricter penalties for incorrect order of credit utilization. |
In Conclusion
The GST Set Off Rules are designed by the Government of India to smoothen the input tax credit flow and avoid the cascading effect of taxes. For a business, this is very important in cash flow management and compliance.
Therefore, by following the hierarchy of set-off rules, doing proper record-keeping, and staying up-to-date with any changes, businesses can make the best of the GST framework.
Proper compliance with set-off rules reduces tax liabilities and enhances the financial efficiency of GST as an effective system of taxation for both the government and the business entities involved.
We hope that after reading this blog you will read and understand the prescribed GST Set Off Rules and will not face any kind of complexity.
FAQs
Q1. What is Rule 18 in GST?
Rule 18 in GST mandates that every registered taxpayer must display their GST registration certificate at their business premises. Additionally, the GST Identification Number (GSTIN) should be clearly shown on the name board at the place of business.
Q2. What is Section 49 of the CGST Act?
Section 49 of the CGST Act outlines the rules for the payment of tax, interest, penalty, and other amounts through electronic cash or credit ledger under the GST regime.
Q3. What is Rule 99 CGST?
Rule 99 of the CGST Rules deals with scrutiny of returns, allowing tax authorities to examine the correctness of returns filed by a taxpayer and issue notices in case of discrepancies.
4. What is the GST turnover limit?
The GST turnover limit for mandatory registration is ₹40 lakhs for goods and ₹20 lakhs for services in most states, but it may vary in special category states.
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