Cross utilization of credits:
Since the Law allows utilization of credit of one component of tax against the other in different situations except for utilization of CGST for SGST and vice versa, the Government needs to do a lot of background accounting to keep the respective accounts of CGST/SGST/IGST straight and compute the respective balances of these accounts after making the respective transfers of funds from one account to the other depending on the computation of taxes paid in a given account and utilization of these taxes as credit for making tax payment in the other account.
For this, the related provisions are incorporated in Section 35(5) & Section 37A of the MGL and Section 7(5) and Section 9 of IGST Act. A combined reading of all these provisions reveals how the government would work out the balances in the respective accounts and transfer the respective funds on the basis of information contained in the valid returns submitted by the taxable person for each tax period:
Order of Utilization of credit: The amount of ITC on account of IGST is allowed to be utilized towards payment of IGST, CGST and SGST in that order. Similarly the amount of ITC on account of CGST is allowed to be utilized for payment of CGST and thereafter for payment of IGST. Further the amount of ITC on account of SGST is allowed to be utilized for payment of SGST and thereafter for payment of IGST. ITC of CGST cannot be utilized for payment of SGST liability and vice versa. (Section 37(5) of MGL and Section 7(5) of IGST Act).
Utilization of input tax credit of CGST for payment of IGST: When the ITC of CGST is used for payment of IGST by the taxable person, Central Government has to receive an amount equal to the CGST so utilized in the IGST account. Thus the Central Government would be required to transfer the fund from CGST account to IGST account equivalent to the amount of ITC of CGST used for payment of IGST. This is important because even though both CGST and IGST accounts are maintained by the Central Government, the distribution of CGST and IGST is to be made in a different manner and therefore, the balances in the respective accounts need to be maintained separately and transfer of funds need to made for this purpose. (Section 37A (1) of MGL).
Utilization of input tax credit of SGST for payment of IGST: When the ITC of SGST is used for payment of IGST by the taxable person, Central Government has to receive an amount equal to the SGST so utilized in the IGST account. Thus the State Government would be required to transfer the fund from SGST account to IGST account equivalent to the amount of ITC of SGST used for payment of IGST. (Section 37A (2) of MGL).
Utilization of input tax credit of IGST for payment of CGST: When the ITC of IGST is used as credit for payment of CGST by the taxable person, Central Government has to receive an amount equal to the IGST so utilized in the CGST account. Thus the Central Government would be required to transfer the fund from IGST account to CGST account equivalent to the amount of ITC of IGST used for payment of CGST. This is important because even though both CGST and IGST accounts are maintained by the Central Government, the distribution of CGST and IGST is to be made in a different manner and therefore the balances in the respective accounts need to be maintained separately and transfer of funds need to be made for this purpose (Section 9 (1) of IGST Act).
Utilization of input tax credit of IGST for payment of SGST: When the ITC of IGST is used as credit for payment of SGST by the taxable person, State Government has to receive an amount equal to the IGST so utilized in SGST account. Thus the Central Government would be required to transfer the fund from IGST account to SGST account equivalent to the amount of ITC of IGST used for payment of SGST. (Section 9 (2) of IGST Act).