The Goods and Services Tax (GST) Council has recalled the limits placed on companies from February this year on settling their tax liability with credits for taxes paid previously on raw materials and services. The move comes after businesses said the restrictions had led to an increase in their tax outgo.

In a clarification issued to field officers on Tuesday, the Central Board of Indirect Taxes and Customs (CBIC) has granted full flexibility to businesses in using the credits for taxes paid on inter-state transactions (integrated GST or IGST) in settling the liability towards GST payable to the Union or state governments. The limitations introduced from February had forced companies to use IGST credits in a certain order that limited their ability to manage their final tax outgo with the tax credits available on the ledger. This, companies have said, led to increased cash outgo in certain scenarios to meet their tax liability while unused tax credits remained on their books.

The CBEC clarification explained that credits from paying taxes on interstate transactions (for raw materials and services) can be used for setting off the GST liability to the central or state governments in any order or in any proportion. The only rider is that if finished goods move across state borders, the IGST credit should first be utilized for settling that liability and the surplus could be used for meeting the tax liability towards central or state GST.

The GST Council introduced the restrictions in February as IGST credit remaining on records was going up, which the tax authorities wanted companies to use up. Experts said the latest clarification offered relief to companies. "This was a much-needed clarification, as this should help bring to rest the varied interpretation apprehended by industry experts on the utilization of IGST credit," said Abhishek Jain, tax partner, EY.

The restrictions on use of tax credits was affecting big companies as they have large value chain across states and have large amounts of input tax credits on their ledger on account of transactions across state borders. The flexibility to use credits from inter-state transactions is a relief for businesses as it is more fungible and can be utilized for meeting tax liability. On the other hand, credits from CGST and SGST payment cannot be cross-utilised.