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Does buying from the same state has any advantage in claiming ITC over interstate?

Reena (Partner) (221 Points)

22 April 2021

If most of someone's input is from another state, meaning their ITC is mainly IGST, would there be loss of ITC if their sales are within the own state? A buyer is asking us to register in their state claiming that they are losing on ITC because they are not able to offset IGST ITC against SGST due to some new rules which came in January and are losing half the ITC. Is it true? As far as I know, IGST can be used to offset against both SGST and CGST. What do you think is the problem?

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4 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 22 April 2021

It depends upon the trade-off between arbitraging, cgst & sgst when it is related to profitability. You can do some simulations and find out what maximises profits and reduces tax deductions.

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CMA Poornima Madhava (CMA) (13112 Points)
Replied 22 April 2021

1) Amended provisions for set off of ITC are in the following order:

a) Set off IGST ITC first fully against IGST liability (if any)

b) Balance IGST ITC (if any) can be utilized in any manner to set off CGST & SGST liability

c) Set off CGST ITC against CGST liablity & SGST/UTGST ITC against SGST/UTGST liabilty.

d) Set off of CGST ITC against SGST/UTGST liability and vice versa not allowed.

2) When the interstate seller buys from you, s/he/it would be able to claim IGST ITC and the same needs to be completely set off against IGST liability of such buyer. If the buyer makes interstate sales, then he may utilize the IGST ITC (on purchases from you).

3) But if the buyer makes interstate purchase (IGST ITC) but sells predominantly within the state (CGST & SGST/UTGST liability), then such person can first set off IGST ITC against IGST liability (if any). Balance IGST ITC can be set off against CGST & SGST in equal proportions to get maximum benefit. If this is not done, then the buyer would end up blocking credit under one head (say CGST) and making payment from the other head (say SGST).

4) The link below provides examples to understand the impact of set off. If one has patience to read it completely, I think it would help to understand even better:

https://cleartax.in/s/gst-input-tax-credit-utilisation#amended

I know I've posted a lot but I've tried my best to keep it minimum. Hope this is not confusing.

Reena (Partner) (221 Points)
Replied 22 April 2021

Thanks for the detailed reply. I have also read the article you posted. So as far as I understood, it shouldn't make any difference to the buyer if the seller is in another state as they can offset IGST against both SGST and CGST. So it should not be any additional advantage if the seller charges SGST and CGST as opposed to IGST. I don't know why they are asking us for that then.