Utilization of Input Tax Credit – India

In this blog, we will learn how to use manual tax entries as a workaround to implement the business scenario of input tax credit utilization for India in the SAP Business ByDesign system. By posting manual tax entries, the system will be able to correctly utilize input tax credit in accordance with Indian taxation laws.

Input Tax Credit Utilization – How it should work as per taxation laws in India

According to the rule, the Integrated Goods and Services Tax (IGST) input tax should be offset first with the IGST output tax. The remaining input tax of IGST should then be offset with the output tax of Central Goods and Services Tax (CGST) and subsequently with the output tax of State Goods and Services Tax (SGST).

Then, the input tax of CGST should be offset first with the output tax of CGST only. The remaining input tax of CGST should then be offset with the output tax of IGST only, and not with the output tax of SGST.

Lastly, the input tax of SGST should be offset first with the output tax of SGST only. The remaining input tax of SGST should then be offset with the output tax of IGST only, and not with the output tax of CGST.

This is not how the SAP Business ByDesign system currently works. The system adds the entire input tax and subtracts the entire cumulative output tax, resulting in an incorrect net final balance for the tax amount.

Example of postings in the system for the tax calculation – Without manual tax entries

Post a supplier invoice having two line items as follows:

One line item with tax code 83 (IGST tax type) and the other line item with tax code 84 (CGST and SGST tax types)

Post a customer invoice having two line items as follows:

One line item with tax code 560 (IGST tax type) and the other line item with tax code 561 (CGST and SGST tax types)

Execute a GSTR-3 tax return run, wherein both the supplier invoice and the customer invoice are picked and reported.

Input tax side (pertaining to the supplier invoice):

IGST – 57.60 INR

CGST – 5.40 INR

SGST – 5.40 INR

Output tax side (pertaining to the customer invoice):

IGST – 30.24 INR

CGST – 22.68 INR

SGST – 22.68 INR

Currently, the system cumulates the entire input tax 68.40 (57.60+5.40+5.40) INR and offsets it with the entire output tax 75.60 (30.24+22.68+22.68) INR, resulting in a net final output of 7.20 INR as the remaining balance in the output tax, which is incorrect as per taxation laws in India.

As per the rule, the input tax of IGST should be offset with the output tax of IGST first. The remaining input tax of IGST should then be offset with the output tax of CGST and subsequently with the output tax of SGST. In the above example, let us offset the input tax of IGST first with output tax of IGST and thereafter with the output tax of CGST.

Result after all the input tax credit of IGST is utilized would be as follows:

Input tax side:

IGST – 0 INR

CGST – 5.40 INR

SGST – 5.40 INR

Output tax side:

IGST – 0 INR

CGST – 0 INR

SGST – 18 INR

Now as per the rule, the input tax of SGST should be offset with the output tax of SGST only, and not with that of IGST or CGST.

The final output after this step as per the taxation law should be as follows:

Input tax side:

IGST – 0 INR

CGST – 5.40 INR

SGST – 0 INR

Output tax:

IGST – 0 INR

CGST – 0 INR

SGST – 12.60 INR

Though the net tax payable in this case would be 7.20 INR, the corresponding G/L accounts do not reflect the balances this way. Hence, the utilization of input tax credit is not in accordance with the Indian taxation laws.

Let us look at the journal entry of the tax return to illustrate this:

In the above case, the account balances are as follows:

Interstate GST Payable – 27.36 INR (Debit)

Central GST Payable – 17.28 INR (Credit)

State GST Payable – 17.28 INR (Credit)

This would be incorrect as per taxation laws in India as explained above.

Applying the input tax utilization rule, the account balances should be as follows:

Interstate GST Payable – 0 INR

Central GST Payable – 5.40 INR (Debit)

State GST Payable – 12.60 INR (Credit)

To achieve the desired result where the input tax utilization rule as per taxation law is applied and the G/L accounts reflect the correct balances as mentioned above, we need to post manual tax entries as a workaround.

Example of postings in the system for the tax calculation – With manual tax entries as workaround

To achieve IGST payable account to reflect 0 INR, since the system currently calculates 27.36 INR (Debit), we will need to post a manual tax entry for the IGST tax type with 27.36 INR (Credit), so that the balances get offset completely, resulting in a zero balance in the account.

Similarly, to achieve CGST payable account to reflect 5.40 INR (Debit), since the system currently calculates 17.28 INR (Credit), we will need to post a manual tax entry for the CGST tax type with 22.68 INR (Debit), so that the balances get offset accordingly, resulting in a balance of 5.40 INR (Debit) in the account.

Similarly, to achieve SGST payable account to reflect 12.60 INR (Credit), since the system currently calculates 17.28 INR (Credit), we will need to post a manual tax entry for the CGST tax type with 4.68 INR (Debit), so that the balances get offset accordingly, resulting in a balance of 12.60 INR (Credit) in the account.

Once the manual tax entries are posted, the GSTR-3 tax return run is scheduled. The supplier invoice, customer invoice and the manual tax entries are picked and reported. The G/L accounts will then reflect the correct balances.

Journal entry of the tax return with manual tax entries posted:

In the above case, the account balances are as follows:

Interstate GST Payable – 0 INR

Central GST Payable – 5.40 INR (Debit)

State GST Payable – 12.60 INR (Credit)

The balances above are as per the Indian taxation laws for the input tax credit utilization.

Summary

Using manual tax entries as a workaround, we can now see how the input tax credit utilization scenario for India can be achieved in the SAP Business ByDesign system.