Let us consider goods which were rated at 28% at the time of purchase by the trader, but which dropped to 18% at the time of sales i.e. post the date on which the GST rate changes took effect. For a moment if we assume that the buying and selling prices are consistent, it effectively means that the trader is using 28% worth of GST input tax credit to offset a GST tax liability worth 18%, and thus is left with an effective unutilised ITC worth 10%.

Likewise, the following are the levels of potential unutilised ITC, GST rate changes being the cause:

GST Rate Changes Potential Unutilised ITC Levels
28% to 18% 10%
28% to 12% 16%
28% to 5% 23%
18% to 12% 6%
18% to 5% 13%
12% to 5% 7%
5% to 0% 5%
3% to 0% 3%

Now, the question which arises is – what happens to this unutilised ITC. Will it continue to lie unutilised in the credit ledger, leading to blocked capital? Or, is there a way in which this can be utilised to offset tax liabilities? The good news is – yes, it can be managed, and here’s sharing 2 options you have as a trader to ensure that your unutilised ITC doesn’t go waste.

Option 1: Offsetting the Input Tax Credit with Tax Liability arising from sales of goods for which rates have not changed

Considering that a sizeable number of goods have been rated down from 28% to 18%, let’s take an example from the same. Let us assume that a trader has purchased Stock A, which belongs to this category of goods, worth INR 1000 before the rate change, and is planning to sell it after the rate change has happened, at an average margin of 10%.

  • Cost to the Trader = INR 1000
  • GST Paid = INR 280 = ITC availed
  • Selling Price = INR 1100 (Assuming a margin of 10%)
  • GST Collected = INR 198 = Tax Liability
  • ITC Unutilised = INR 280 – INR 198 = INR 82

Now, realistically speaking, the same trader must also be dealing with other goods, for whom rates have not changed at all. Let us assume that the trader has also purchased Stock B worth INR 1000, which belongs to this category of goods, rated at 18%, and sells it, again at the same average margin of 10%.

  • Cost to the Trader = INR 1000
  • GST Paid = INR 180 = ITC availed
  • Selling Price = INR 1100 (Assuming a margin of 10%)
  • GST Collected = INR 198 = Tax Liability
  • ITC Unutilised = INR 180 – INR 198 = – INR 18 = Pending Tax Liability

Thus, one key observation from here is, that in the scenario where the GST rates have not changed, the trader will always be collecting more GST from his customer, compared to GST which he is paying to his supplier – the simple reason being that his selling price will always be higher than his cost price, because he will always be adding value to the product and thus selling his goods at some margin.

When he files the returns for the month, the unutilised ITC resulting from sales of Stock A i.e. INR 82 can be used to offset the pending tax liability resulting from sales of Stock B i.e. INR 18. It is also obvious, that more the value of Stock B, more will be the tax liability, and a point is bound to come where the unutilised ITC resulting from sales of Stock A can be fully utilised over a period of time.

Option 2: Refund of Unutilised Input Tax Credit resulting from Inverted Duty Structure

As per the GST law, a taxpayer can claim refund of unutilised ITC at the end of the relevant tax period, thus on a monthly basis. Reversal of input tax credit will be granted where the input tax credit accumulation has taken place on account of inverted duty structure – wherein the rate of tax on inputs are higher than the rate of tax on output supplies. However, there are certain notified supplies, where refund of ITC will not be allowed, even if credit has got accumulated due to inverted duty structure. Time lines have been set for processing of refund claims and ITC claims not settled within 60 days will be paid with interest @6%. Moreover, 90% of the claim would be paid within 7 days of acknowledgement of claim on provisional basis. Claims are to be filed with minimum documentation and the refund amount will be credited directly to the claimant’s bank account. The process is online and hassle free and with minimum interface with tax authorities.

In conclusion, it can be said that traders need not be concerned about their unutilised ITC entitlement due to the recent GST rate changes. Even if the needful is not achieved by offsetting the input tax credit under GST against the tax liability resulting from sales of other goods, there is still a neat provision wherein the refund of such ITC can be claimed, in the background of the inverted duty structure.