Cross-Utilization of Credits and Fund Transfer

Team Masters India
Team Masters India at March 15, 2022
Cross-Utilization of Credits and Fund Transfer

The Goods and Services Tax (GST) was introduced as a unification of indirect taxes. It was mainly divided into Central (CGST), State (SGST), and Integrated (IGST) GST. CGST and SGST mainly apply to supplies within a state, whereas IGST is applied on interstate and international supplies. CGST is a representation of tax levied by the central government, SGST by the state governments, and IGST contains the shares of both the center and states.

This article further discuss about the topics that are relevant to the cross utilization of credits and fund transfer in descriptive manner. The topics include: Cross utilisation of ITC, manner of utilisation of GST credit, cross utilization meaning and much more.

Cross-Utilization of Credits

GST allows cross-utilization of credits between taxes. This means that a credit component of CGST/SGST can be utilized for IGST, and vice versa. However, credits of CGST and SGST cannot be used interchangeably. Due to cross-utilization of credits, there is much background accounting that needs to be done by the government. This is done to maintain proper accounts of the taxes and equate the transferred funds in right accounts, according to the credits utilized.

Methods of Cross-Utilization of Credit

Order of Credit Utilization: Under the IGST Act, Input Tax Credit (ITC) amount is to be used in different orders of priority for each component of GST. For IGST, the cross utilization of ITC is allowed first for IGST, then CGST, and at last SGST. For CGST, ITC is allowed for utilization first for CGST and then for IGST. For SGST, ITC is allowed for utilization first for SGST and then for IGST. As far as cross utilization of ITC between CGST and SGST is concerned ITC cannot be used for making payments between CGST and SGST.

For instance,

Mr. A is a manufacturer who manufactured the goods of Rs. 90,000 and sold it on the profit of Rs 10,000.

Mr. B purchased goods from Mr. A for 1,00,000 INR and sold it further at the profit of Rs 10,000 (Intra-state).

Further the goods are sold to Mr. C who is a retailer for Rs 1,10,000 and he further sold it on a profit of Rs. 10,000 (Inter-state) to Mr. D

Mr. D is a consumer who purchased the good from Mr. C.

Assuming the GST rate @18%

Particulars Mr. A Mr. B Mr. C Mr. D
COST
Production or 90,000 1,00,000 1,10,000 1,41,600
Purchase Price
PROFIT 10,000 10,000 10,000
SALE PRICE 1,00,000 1,10,000 1,20,000
TAX
IGST - 19,800 -
CGST 9,000 - 10,800
SGST 9,000 - 10,800
INVOICE VALUE 1,18,000 1,29,800 1,41,600

Mr. A

Particulars Liability Input Tax Credit Cash
IGST CGST SGST
IGST - - - -
CGST 9,000 - - - 9,000
SGST 9,000 - - - 9,000

Mr. B

Particulars Liability Input Tax Credit Cash
IGST CGST SGST
IGST 19,800 - 9,000 9,000 1,800
CGST - - - - -
SGST - - - - -

Mr. C

Particulars Liability Input Tax Credit Cash
IGST CGST SGST
IGST - - - - -
CGST 10,800 10,800 - - -
SGST 10,800 9,000 - - 1,800
 

Utilization of CGST Credit for IGST: Cross utilization meaning is an amount equal to the ITC used for IGST payment through the CGST account will be received by the government in the IGST account. This means that the central government will be required for transfer of fund, equal to the amount of ITC used for IGST payment from CGST account to IGST account. Although the central government maintains both, IGST and CGST accounts, both the taxes are to be used in different manners. Thus, the purpose of transfer of funds is because the balances of CGST and IGST accounts are to be maintained separately. Cross utilization of ITC is not allowed between CGST and IGST.

Utilization of SGST Credit for IGST: An amount equal to the ITC used for IGST payment through the SGST account will be received by the government in the IGST account. This means that the respective state government will be required for transfer of fund, equal to the amount of ITC used for IGST payment from SGST account to IGST account.

Utilization of IGST Credit for CGST: An amount equal to the ITC used for CGST payment through the IGST account will be received by the government in the CGST account. This means that the central government will be required for transfer of fund, equal to the amount of ITC used for CGST payment, from IGST account to CGST account. Although the central government maintains both, IGST and CGST accounts, both the taxes are to be used in different manners. Thus, the purpose of transfer of funds is because the balances of CGST and IGST accounts are to be maintained separately.

Utilization of IGST Credit for SGST: An amount equal to the ITC used for SGST payment through the IGST account will be received by the government in the SGST account. This means that the respective state government will be required for transfer of fund, equal to the amount of ITC used for SGST payment, from IGST account to SGST account. Let us understand how the government accounts are adjusted. In above example adjustment shall be made in the following manner.

Particulars IGST CGST UPGST DGST
SALE FROM A TO B - - - -
Addition to CGST - 9,000 - -
Addition to UPGST - - 9,000 -
SALE FROM B TO C - - - -
Transfer to IGST - -9,000 -9,000 -
Addition in IGST 19,800 - - -
SALE FROM C TO D - - - -
Transfer to CGST -10,800 - - -
Transfer to SGST -9,000 - - -
Addition in DGST - - - 10,800
Addition in CGST - 10,800 - -
TOTAL NIL 10,800 NIL 10,800

Thus, the provisions mentioned above will further help in facilitating cross-utilization of Input Tax Credit between CGST/SGST and IGST.

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