The atrocity of Section 49(5), clause (e) & (f): When GST Credit Utilization Becomes a Trap

Introduction

The Goods and Services Tax (GST) regime in India was envisioned as a seamless credit flow mechanism across the supply chain. However, certain provisions, particularly Section 49(5) clause (e) and (f) of the CGST Act, have created significant hardships for genuine taxpayers. These clauses mandate a restriction on mutual set-off for input tax credit (ITC) utilization, often leading to blocked credits and cash flow disruptions.

Legal Background

1. To exhaust CGST ITC Section 49(5) (c) proviso: -

“Provided that the input tax credit on account of State tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax”

Mandates the taxpayer to exhaust CGST credit against IGST liability first (and then use SGST), which leads to stranded SGST balances.

2. The Mutual Set-Off Blockade: Section 49(5)(e) and (f): -

Under the GST structure, cross-utilisation between CGST and SGST is not permitted. Thereby, a requirement to pay CGST occurs in cash when subsequent intra-state sales occur despite the SGST Balance.

Example: Local Purchase, Interstate Sale, then Local Sale

A trader in Neemuch, Madhya Pradesh, purchases goods locally worth ₹1,00,000 and pays ₹9,000 CGST + ₹9,000 SGST. He then sells the goods interstate to a dealer located in Delhi for ₹50,000, incurring ₹9,000 IGST. As per Section 49(5), he must utilise CGST first (₹9,000), and cannot touch SGST, leaving a balance of SGST ₹9,000.

Now, when he makes a local sale in Neemuch, Madhya Pradesh, for ₹60,000 to finally clear stock after booking a profit of ₹10,000, with ₹10,800 (5,400 CGST + 5,400 SGST) liability, he has no CGST ITC left and must pay ₹5,400 in cash, while ₹3,600 [₹9,000 ITC (-) ₹5,400 Liability] SGST sits idle in Credit Ledger despite no goods stock balance.

Adding to the apathy, the law doesn’t permit a refund of such a balance SGST lying in the E-Credit ledger.

 A few of the Industry Impacts

• APMC Traders: Procure goods locally, usually, and sell outside the state. CGST used up, SGST stuck.
• Works contractors: Assets procured under IGST, but revenue is billed locally. This creates CGST-SGST imbalance.
• RCM: Services like Freight/legal/security usually generate CGST/SGST inflow, but lead to one-sided accumulation in the case of IGST sales.
• Logistics: Repair and maintenance, Insurance, Tyres, etc. (CGST/SGST inflow), Interstate transport (IGST output). SGST builds up unused.

Note: - Buying any capital assets enhances the pain of unused SGST.

Legislative Intent & IGST Settlement Mechanism

The “CGST-first” rule is designed to maintain fiscal balance—when IGST is paid using CGST, the Centre retains revenue, while SGST credit utilization for IGST requires a fund transfer from the Centre to the State.

This hierarchy is rooted in the IGST settlement mechanism, which ensures book adjustments between the Centre [IGST] & Centre [CGST] based on returns filed by the person [Reference Form GST STL – 02.01].

While this aids in settlement book-keeping for revenue authorities, it disregards the commercial realities of taxpayers.

Impact on Business & Suggested Reforms

• Cash flow strain despite available credit.
• Artificial credit blockage is affecting MSME’s disproportionately.
• Amend Section 49(5) to either allow proportionate utilization of CGST/SGST for IGST or mutual utilization of CGST-SGST.
• Sections 49(5) (e) and (f), though well-intentioned, act as a fiscal control mechanism at the cost of taxpayer liquidity. It’s time to prioritize practical efficiency and fairness by amending these provisions to reflect real-world business flow.