The Goods and Services Tax (GST) law, primarily under Rule 88A and Section 49, prescribes a mandatory sequence for utilizing the Input Tax Credit (ITC) to discharge output tax liability. The core rule dictates that Integrated GST (IGST) ITC must be fully exhausted first, and it can be used against IGST, Central GST (CGST), and State/Union Territory GST (SGST/UTGST) liabilities in any order or proportion. Only after the IGST credit is zeroed out can the CGST and SGST/UTGST credits be used. CGST ITC must first offset CGST liability, with the remainder going towards IGST liability, but it cannot be used against SGST/UTGST. Similarly, SGST/UTGST ITC must first offset its respective tax liability, with the remainder going towards IGST, but it cannot offset CGST. The flexibility in utilizing the residual IGST ITC—for example, allocating it proportionately between CGST and SGST liabilities—is critical, as demonstrated in a practical scenario, to minimize the cash outflow required to settle the final tax liability.
1. Coverage of this article:
In this article, I am covering how the output liability of GST is adjusted against the ITC available in the electronic credit ledger. It will save your cash outflow if you adopting the set off provision which explained below.
2. Bare Act of Rule 88A. Order of utilization of input tax credit:
Input tax credit on account of integrated tax shall first be utilised towards payment of integrated tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State tax or Union territory tax, as the case may be, in any order:
Provided that the input tax credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilised fully.
3. Bare Act of Section 49B. Order of utilisation of input tax credit:
Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub section (5) of section 49, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax.
4. Bare Act of Sec 49(5):
(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of-
(a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;
(b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;
(c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax
4[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;];
(d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax:
5[Provided that the input tax credit on account of Union territory 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;]
(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and
(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.
5. Types of liabilities:
a. Output of Integrated Goods & Services Tax (Output IGST)
b. Output of Central Goods & Services Tax (Output CGST)
c. Output of State Goods & Services Tax (Output SGST)
d. Output of Union Territory Goods & Services Tax (Output UTGST)
6. Types of Input tax credit:
a. Input tax credit of Integrated Goods & Services Tax (Input of IGST)
b. Input tax credit of Central Goods & Services Tax (Input of CGST)
c. Input tax credit of State Goods & Services Tax (Input of SGST)
d. Input tax credit of Union Territory Goods & Services Tax (Input of UTGST)
7. Off set of output liabilities with input:
a. IGST input can be off set with the all types of liabilities.
b. CGST input can be off set with the all types of liabilities except SGST & UTGST.
c. SGST input can be off set with the all types of liabilities except CGST.
d. UTGST input can be off set with the all types of liabilities except CGST.
e. CGST & SGST cannot be set off with each other. It means Cross utilisation not permissible.
f. CGST & UTGST cannot be set off with each other. It means Cross utilisation not permissible.
8. Steps for off -setting of liabilities:
a. IGST input will first be utilised against IGST output.
b. Remaining input of IGST will be used against SGST/UTGST output or CGST output or it can be utilised in both in any ratio.
c. CGST & SGST/UTGST input can-not be used before utilisation of full input of IGST. IGST input must be fully utilised before utilisation of CGST & SGST/UTGST input.
d. Now, CGST input will be utilised against CGST output.
e. CGST input will be utilised against IGST output.
f. SGST/UTGST input will be utilised against SGST/UTGST output.
g. SGST/UTGST input will be utilised against IGST output.
h. If balance of output remains, it must be paid in cash.
9. Order of utilisation after amendment:
10. Practical scenario:
| Type | IGST | CGST | SGST |
| Output | 40,000 | 1,70,000 | 1,70,000 |
| Input | 50,000 | 1,40,000 | 1,40,000 |
In this example, IGST input used in SGST output before utilising in CGST output.
| Input Set off | ||||
| Output | IGST | CGST | SGST | Total input utilised against output |
| IGST | 40,000 | – | – | 40,000 |
| CGST | – | 1,40,000 | Not allowed | 1,40,000 |
| SGST | 10,000 | Not allowed | 1,40,000 | 1,50,000 |
| Payment required in cash | – | 30,000 | 20,000 | |
Total payment required in cash is 50,000.
| Type | IGST | CGST | SGST |
| Output | 40,000 | 1,70,000 | 1,70,000 |
| Input | 50,000 | 1,40,000 | 1,40,000 |
In this example, IGST input used in CGST output before utilising in SGST output.
| Input Set off | ||||
| Output | IGST | CGST | SGST | Total input utilised against output |
| IGST | 40,000 | – | – | 40,000 |
| CGST | 10,000 | 1,40,000 | Not allowed | 1,50,000 |
| SGST | – | Not allowed | 1,40,000 | 1,40,000 |
| Payment required in cash | – | 20,000 | 30,000 | |
The total payment required in cash is 50,000. In both of the above cases, total payment amount will remain same because we have utilised full amount in CGST or SGST, instead of using it proportionally. I am explaining this below by taking one practical scenario.
11. Most important: Saving in cash outflow:-
a. Practical scenario 1:
| Type | IGST | CGST | SGST |
| Output | 1,00,000 | 50,000 | 50,000 |
| Input | 1,50,000 | 10,000 | 10,000 |
–
| Input Set off | ||||
| Output | IGST | CGST | SGST | Total input utilised against output |
| IGST | 1,00,000 | – | – | 1,00,000 |
| CGST | 50,000 | – | Not allowed | 50,000 |
| SGST | – | Not allowed | 10,000 | 10,000 |
| Payment required in cash | – | – | 40,000 | |
If we used input of IGST against CGST output before using in SGST output then total cash outflow will be 40,000.
| Type | IGST | CGST | SGST |
| Output | 1,00,000 | 50,000 | 50,000 |
| Input | 1,50,000 | 10,000 | 10,000 |
b. Practical scenario 2:
| Type | IGST | CGST | SGST |
| Output | 1,00,000 | 50,000 | 50,000 |
| Input | 1,50,000 | 10,000 | 10,000 |
–
| Input Set off | ||||
| Output | IGST | CGST | SGST | Total input utilised against output |
| IGST | 1,00,000 | – | – | 1,00,000 |
| CGST | 25,000 | 10,000 | Not allowed | 35,000 |
| SGST | 25,000 | Not allowed | 10,000 | 35,000 |
| Payment required in cash | – | 15,000 | 15,000 | |
12. The order of utilisation of IGST credit post offset to IGST liability can be in any order or proportion between CGST/SGST but the only pre-condition is exhausting IGST completely before using other credits. Hence, from the above table for new rules, it can be concluded that any taxpayer must begin with set-off process starting with ITC of IGST and utilise it completely before proceeding to utilise the ITC of CGST or ITC of SGST.
13. In this case, I have utilized 50% of the IGST input credit towards CGST and the remaining 50% towards SGST, instead of applying the balance IGST ITC entirely to a single head. As a result, the total cash outflow comes to 30,000 instead of 40,000, thereby saving the assessee 10,000.
14. ** The main objective of this article is to explain how a person can reduce cash outflow by applying the set-off provisions, demonstrated through the analysis of various scenarios. I am also not contravening the law; I have applied the set-off provisions strictly in accordance with the GST law.
15. If anyone wants an excel sheet for offsetting the GST liabilities. I have prepared one that automatically calculates the ITC set off along with the payment required in cash. Kindly drop me an email at caashishsingla878@gmail.com & I will share it with you.
16. Amendment via. Circular No. 98/17/2019-GST dated 23rd April 2019.
17. Availment of ITC:
It means transfer of credit into the Electronic credit ledger. The amount reported in Table-4C of GSTR-3B is transferred to the Electronic credit ledger & this is referred to as the availment of ITC. It increases the credit balance.
18. Utilisation of ITC:
It refers to the amount of ITC that has been utilized for setting off the output tax liability. This utilization reduces the balance in the Electronic Credit Ledger.
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If you have any queries, you can reach the author by email at caashishsingla878@gmail.com or by phone at 9896478194.
Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-related decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.
Author Bio
Very nice & useful article
Dear
Thank you for such a nice compliment.
you appears to be not CA and unprofessional. pl see heading of your article. this ITC provision is there since last 5-6 years. you are stating amendment in ITC set off provision which gives an impression that there is recent change in ITC set off provision.
Admin is requested to blacklist such persons
I have clearly mentioned the circular number and the date of the amendment. I have not stated that the amendment is effective from today. For your kind information, please communicate in a professional manner.