Order of Utilization of ITC Under GST | Trick to Remember | CA Final IDT | CA Akshansh Garg

Summary

The video explains the concept of 'Order of Utilization of Credit' in GST, using a family analogy to simplify the complex taxation process. It details how CGST, SGST, and IGST are used to offset output tax liabilities. The explanation highlights how IGST is prioritized, followed by CGST and SGST, and how credits are allocated based on the available balance in each category. The video also addresses various scenarios, including when credits are insufficient, and emphasizes efficient tax planning to minimize cash payments. Viewers are encouraged to understand this process for better handling of GST liabilities.

Takeaways

• 😀 The concept of the 'Order of Utilization of Credit' is essential when solving GST-related questions to ensure full marks.
• 😀 There are three main types of taxes: CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), and IGST (Integrated Goods and Services Tax).
• 😀 The metaphorical approach to understanding these taxes: CGST is the 'Mother,' SGST is the 'Wife,' and IGST is the 'Son.'
• 😀 IGST is always used first, followed by CGST and SGST, ensuring that credits are utilized in the correct sequence.
• 😀 If IGST has extra funds, it will transfer them to CGST and SGST in equal amounts, based on the requirements.
• 😀 In case IGST has insufficient funds, CGST and SGST can borrow from each other, but they cannot mutually contribute to one another directly.
• 😀 When the output tax liability exceeds available input credits, the IGST will first use its own funds, then CGST and SGST will utilize theirs.
• 😀 The priority of using funds is always from IGST first, followed by CGST and SGST, based on the availability and requirement.
• 😀 If CGST or SGST have insufficient funds, they will first try to take from IGST, but each will utilize its own credits before considering others.
• 😀 Strategic planning is key in GST: the minimum cash payment should ideally be made from SGST to optimize credit usage and reduce cash outflow.

Q & A

What is the concept of 'order of utilization of credit' in GST?

The 'order of utilization of credit' refers to the sequence in which credits from CGST, SGST, and IGST are applied to offset output liabilities. It helps determine which credit to use first when there's an excess or shortage of funds in the system.

How does the metaphor of a family (mother, son, and daughter-in-law) help explain the concept?

The metaphor uses CGST as the mother, IGST as the son, and SGST as the daughter-in-law. This simplifies the process by showing that IGST always uses its own funds first. CGST and SGST rely on IGST to cover their excess, but they cannot use each other's credits.

What is the role of IGST in the order of utilization of credit?

IGST plays a central role as it is used first to cover output liabilities. If IGST has excess funds, they are used to settle the liabilities of both CGST and SGST. If there’s a shortage in IGST, CGST and SGST will use their own credits to cover their liabilities.

What happens when IGST has excess funds?

When IGST has excess funds, it first covers its own liabilities. Any remaining excess is then distributed to CGST and SGST, depending on their needs. This ensures that all liabilities are covered without requiring cash payments unless there’s a shortfall.

How do CGST and SGST work together in credit utilization?

CGST and SGST cannot directly use each other's credits. They both rely on IGST to cover their shortfalls. If IGST cannot cover the full deficit, they will use their own credits (CGST will use CGST, and SGST will use SGST).

What happens if there is a shortage in IGST, CGST, or SGST?

If there is a shortage in IGST, it will first take funds from CGST, then from SGST. If there’s a shortage in CGST or SGST, they will try to cover it by using their own credits first. If needed, they can utilize IGST to cover any remaining shortfall.

Can CGST and SGST share their credits with each other?

No, CGST and SGST cannot share credits with each other. Each tax head can only utilize IGST credits or their own credits to meet liabilities.

What is the significance of prioritizing IGST in credit utilization?

Prioritizing IGST ensures that the most flexible and abundant source of credit is used first to cover liabilities. IGST can be applied to both CGST and SGST, helping to minimize the need for cash payments and simplifying the process of tax payment.

How is the 'minimum cash payment' strategy applied in GST credit utilization?

The 'minimum cash payment' strategy ensures that the minimum amount of cash is used to cover liabilities. For example, if the question specifies that maximum credit should be used in SGST, excess credits from IGST will be transferred to SGST first, minimizing the need to use cash.

What should happen if the son (IGST) has insufficient funds to cover liabilities?

If IGST has insufficient funds, it will first cover its own liabilities. If it cannot fully cover them, CGST and SGST will step in to fill the gap, starting with CGST and then SGST, depending on which credits are available.