NEW ITC ADJUSTMENT METHOD FROM 1ST FEB 2019

Hello Friends,
One of major changes took place from 1st Feb 2019 regarding Input Tax Credit Adjustment. As per latest amendment stated as below
Section 49A- Utilization of ITC subject to certain conditions
Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully towards such payment.

Explanation:-
Above section state that ITC of IGST will be used fully first against the Payment of IGST/CGST and SGST then after only CGST and SGST ITC can be used against the payment of Liability. There is  condition that CGST and SGST cannot be cross utilized for the payment of tax

If you want to learn entry in Tally on new GST adjustment click here

To view Entry in Tally Click here

Click here to watch :- How to Avoid GST liability under GST ITC Method

Important Note
New Section 49B is inserted to provide that Government may decide the order of utilisation of ITC on account of IGST, CGST and SGST subject to the condition that CGST and SGST cannot be cross utilised

Now many of us will think that this will not affect our working but it will have serious impact on cash flow of organization where Input ITC under IGST is more than Liability of IGST.

This article will help you to understand the old Method and New Method of Input Tax Credit Adjustment, how it is going to hit the working style.
Let us understand the both method and impact on cash flow from both methods. Under new method of ITC adjustment, we need to focus on Input Tax Credit Balance under IGST.
Let Us understand the ITC Adjustment method with few examples under both method

Example : Following balance under GST appear for month of Feb-2019
Tax head
Input Tax (INR)
Output Tax (INR)
IGST
25,000
12,000
CGST
20,000
30,000
SGST
20,000
30,000
Total
65,000
72,000

If you will see overall basis you can find Next Tax payable as =Total of Output Tax Less Total Input Tax

Net Tax payable = 72,000 – 65,000 = INR 7,000 (A taxpayer need to pay Tax of INR 7,000)
Here finding payable amount is not important but it is important to find Tax head type. Taxpayer need to identify under which tax head challan should be generated?

OLD METHOD OF ITC Adjustment: Let us understand the above example according to old method.
According to previous method 1st step towards adjustment is inter adjustment as follow

1st Step - Under first step each tax head output will be adjusted to input Tax credit

Tax head
Output Tax (i)
Input Tax (ii)
Tax Balance (i) – (ii)
IGST
12,000
25,000
(13,000)
CGST
30,000
20,000
10,000
SGST
30,000
20,000
10,000
Total
82,000
65,000
7,000

(Note : There is no Tax balance under IGST as Input Tax Credit is higher then liability.)

2nd Step : 1st step state that output and input tax will be adjusted under same head. It means Input CGST will be used against output CGST  and similar for rest. Now 2nd Step is cross utilization of Tax as below

Note : We have balance of Input Tax Credit under IGST i.e 13,000 after completing 1st step
Tax Head
Tax Balance (i)
Input Tax Balance (IGST) (ii)
Net Tax Payable
IGST
0.00
0..00
0.00
CGST
10,000
10,000
0.0         (i) – (ii)
SGST
10,000
3,000
7,000 (i) – (ii)
Total
20,000
13,000
7,000 (i) – (ii)

Tax balance under IGST is Zero because there is no tax payable left there is balance of Input Tax Credit.
Hence 2nd steps shows that Input Tax credit under IGST balance was used against CGST liability first and then balance amount 3,000 was used against liability of SGST. After working of all we found that 7,000 tax amounts need to be paid under head of SGST

We saw above example in 2 steps that can be solve in single steps as below (Same OLD method in single step). (Please to understand the example please refer symbol of (i),(ii),(iii),(iv),(a) and (b).)




Hint : Sign XXXXXX refers as Not Applicable No amount can be filled there.

NEW ADJUSTMENT METHOD OF ITC
So After understanding the above example in old Method let us understand the same example with new Method.

1st Step of Adjustment: Please note that “Input Tax Credit Balance under IGST is = INR 25,000”



2nd Steps of Adjustment (Input Tax Credit Balance CGST=20,000 & SGST = 20,000, IGST= Zero)




Now as per new method you can see that Tax payable under SGST =10,000
Working Note : Under this new method after working we can find that there will input Tax credit balance under CGST = 20,000 – 17,000 = 3,000 INR,which can not be used against the liability of SGST.

Hence there is issue of credit blocking under CGST. Even though you have credit balance but can not used for liability adjustment.

Conclusion : So if you will compare both method as below
SGST Payable under old Tax ITC Adjustment method = 7000 INR
SGST Payable under new Tax ITC Adjustment method = 10,000 INR
Along with that there will be balance of Input Tax credit balance under CGST which can not be used against liability against SGST. (Cross Utilization of CGST and SGST can not be done)

Why this adjustment has been done?
As per this mechanism central government will be able to disburse GST amount to state Government. It is going to badly impact cash flow of organization. What do you think is this master stroke or anything else?

What do you think on new method of ITC adjustment? Don’t forget to share to your valuable feedback on comment section or mail.

 If you want to know how to pass entry in Tally according to new method click on below link

 https://youtu.be/46i3RNrAU9Q
Regards,
Parvez Ansari
GST AND TALLY WALA