A) Background.
Settlement refers to discharge of tax liability to the government. Tax liability arises under below scenarios:
Outward Supplies (Sales, Transfers)
Inward Supplies that are subject to Reverse charge (Purchases, inward transfers)
Credit Reversal Adjustments
Negative credit from Purchase Transactions
Negative Credit for ISD Distributions
This tax liability on both interstate transactions (IGST) and intrastate transactions (SGST, CGST) is to be discharged on a monthly basis to the government. GST paid on purchase transactions can be taken as credit subject to certain conditions. Such credit can be offset against the tax payable on Sales.
Hence, GST payable on sales transactions can be discharged by payment of cash or utilization of credit or both. Credit utilized can be credit pertaining to the same component or different components. As per Model GST Law, credit of IGST, CGST and SGST shall be claimed in the chronological order as given below:
Claim Setoff Table: In order to permit users to define cross credit utilization, Claim Setoff table has been provided (GST Components – Actions). For each component of tax, the cross credit component and its priority can be assigned in this table. To illustrate, for discharging IGST liability, credits of CGST and SGST can be used. Similarly, CGST liability and SGST liability can be offset with IGST liability. This can be claimed in the Claim Setoff table as given below:
The first priority for any component would be that component itself. This logic is inbuilt. The above table is setting priorities for other components.
Reverse charge Liability shall always be discharged in cash. Credit can be availed in the month of tax remittance to the government.
For Outward supplies, GSTR-1 is to be filed monthly by 10th of the succeeding month. Based on the transactions reported in the return, Output liability is determined. GSTR-2 is the inward supply return, which is required to be filed by the 15th of the succeeding month. This return determines the credit that can be availed. Three ledgers are maintained on the GSTN portal – Liability ledger, Credit Ledger and Payment ledger. Liability ledger is updated based upon GSTR-1 filed, Credit ledger is updated based upon GSTR-2 filed and Cash ledger is updated on tax payment made in cash.
As on date, it is not clear, whether the taxpayer has to offset the available credit compulsorily or liability can be discharged in his own way either utilizing credit fully or partly or discharging entire liability in cash, despite availment of credit. GSTR-3 does not contain any tables where this sort of tax planning can be done.
Hence there should be some mechanism in the system where by user can record the Tax Liability, Credit availed, Credit utilized and cash payment made in cash, which is called Settlement. In a word to say, system should replicate the settlement process done in GSTN portal but in a bit different way.
For GSTN portal, the returns filed becomes the source for accomplishing the process. As the transactions are posted in the system itself, the tax entries generated by posted transactions becomes the source for accomplishing the process of settlement and GST Settlement screen becomes the venue where such process is accomplished.
B) Process of Settlement
1) Settlement of Net Payment Liability.
System auto-populates the net Payment Liability and the Total Credit availed in settlement Screen for the given period
Credit Utilized shall be auto populated by the system based on the priorities set out in Claim Set-off table. However, the user can edit the same.
The auto population of credit utilization shall be based on the assumption that unless the credit availed – both own credit (Credit of the component itself) and cross credit (credit of other components) is utilized fully, cash payment for a particular component shall not arise.
Examples for auto-population of Credit Utilized field in GST Settlement. Settlement entirely through Credit (System auto-populates credit utilized as given in the example)
Assuming the priority set out in Claim Set-off table given above, each component’s credit is utilized first for that component itself. Any balance left over can be utilized for discharging tax liability of other components.
In the given example, SGST Tax liability is Rs.15000 and Credit Available is Rs. 20000. The credit is utilized for discharging SGST liability first. Balance Credit of Rs. 5000 (20000-15000) is used for discharging IGST liability.
CGST Tax liability is Rs.10000 and Credit Available is Rs. 15000. The credit is utilized for discharging CGST liability first. Balance Credit of Rs. 5000 (15000-10000) is used for discharging IGST liability.
IGST Tax liability is Rs.20000 and Credit Available is Rs. 10000. The credit utilized becomes Rs. 20000, which is sum of IGST Credit – Rs. 10000, CGST balance Credit 5000 and SGST balance credit Rs. 5000.
Other Validations:
Credit cannot be utilized for payment of interest, penalty, fees and others. They shall always be paid in cash.
Credit Utilized and Payment amount shall not exceed tax liability
Total Credit utilized for a particular component shall not exceed total credit availed of that components plus Surplus credit of other components prioritized in claim-set off table for such component.
Account No. and Account Type shall be the same for all tax components. However, Interest Account, Fees Account, Penalty Account and Others Account can be defined differently for different tax components.
Credit cannot be utilized for payment of Reverse Charge Liability. The entire liability is to be discharged in cash.Once settlement is done for any Payment/Refund document, the same cannot be reversed in system.