GST Software
December 19th, 2018 in GST

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:

  1. Cross-Utilization of Credits
  2. Methods of Cross-Utilization of Credit

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, ITC is allowed for utilization 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 mentioned above, 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
Purchase Price

90,000

1,00,000

1,10,000

1,41,600

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: 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.

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.