Companies stare at cash flow problems on account of GST credits.

The Economic Times By Sachin Dave Feb 15, 2019, 08.23 AM IST

Companies can set off their tax liabilities by first utilising their IGST credits before availing of their CGST & SGST credits.

Previously, companies could set off IGST credits against both CGST and SGST.

A tweak in the rule on availing goods and services tax (GST) credits may create cash flow problems for some companies starting this month. The change is in the way companies can set off tax paid on raw material against those levied on the goods they sell, which is meant to avoid double counting of taxes.

According to the credit utilisation mechanism announced late last year, companies can set off their tax liabilities by first utilising their integrated GST (IGST) credits before availing of their central GST (CGST) and state GST (SGST) credits. Previously, companies could set off IGST credits against both CGST and SGST.

Tax experts said this has started to result in situations where companies end up paying GST in cash even though they have credits on their books. “This amendment has become apoint 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, these could be paid by utilising credits. The reason being the introduction of this new rule of utilisation of IGST credit,” said Abhishek Jain, tax partner at EY India. IGST credits are accumulated by companies that import goods or source them from vendors in other states. Collections under IGST are shared between the central and the state governments. Tax experts said the regulation change could result in litigation.

"The main objective of GST is that there should be no tax cascading, but the underutilised or non-utilised credit would lead to exactly that. The constitutional validity of this tax cascading could be challenged in court," said Abhishek A Rastogi, a partner at Khaitan & Co.

The only way companies can solve this problem is by altering their supply chain structures. However, this may not be possible for most companies because supply chains cannot be determined merely to save taxes, industry experts said.

With the new regulation requiring utilisation of IGST credits first, industry experts said that many companies with a national presence will have credits accumulated in one state and taxes pending in other states.

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