How to Set Off Input Tax Credit Against Tax Liability in GST Regime

GST Input Tax Credit Explained

GST is a dual concept system. On every transaction (within a state), there will be component of Central GST (CGST) and State GST (SGST). Integrated GST (IGST) is for interstate transactions. Therefore, it is important for businesses to know how to set off the input credit against each of these components in the order as prescribed by the Law.

The order in which credit needs to be set off is explained in the table below:

Input Tax Credit	Set off against liability
CGST (Central GST)	CGST and IGST (in that order)
SGST (State GST)	SGST and IGST (in that order)
IGST (integrated GST)	IGST, CGST, SGST (in that order)

Discuss with an example.

Example 1 – How can CGST and SGST ITC be used?

Xyz Ltd. is a bike manufacturer located in Rajasthan. The details of transactions effected by Xyz Ltd. are furnished below along with the tax component:

Party Name	Destination State	Transaction Type	Product	Input Credit		Tax Liability
				CGST	SGST	CGST	SGST
Ratan Steel	Rajasthan	Purchase (Inward Supply)	Steel	1,20,000	1,20,000	–	–
Paras Automobiles	Rajasthan	Sales (Outward Supply)	Bike	–	–	36,000	36,000
Paras Automobiles	Rajasthan	Sales (Outward Supply)	Spare parts	–	–	90,000	90,000

At the end of the month, Xyz Ltd. adjusts available input credit against their  tax liability

In the example, Xyz Ltd. has a tax liability of 1,26,000. Here is how it happens:

1. XYZ Ltd. have Input tax credit of 1,20,000 each against CGST and SGST.

2. As prescribed by Law, XYZ Ltd. first utilized ITC of CGST 1,20,000 to set off CGST liability of 1,26,000 (36,000+90,000). After this adjustment, CGST liability is 6,000 (1,26,000 – 1,20,000).

3. Later, SGST input credit of 1,20,000 is set off against SGST liability of 1,26,000 (36,000+90,000). After setting off SGST input credit, 6,000 (1,26,000 – 1,20,000) is the SGST liability.

4. After utilizing the available input credit of both CGST and SGST,the tax liability of XYZ Ltd. is 12,000 (CGST liability 6,000 + SGST liability 6,000).

5. Any input credit balance of CGST, after setting off tax liability towards CGST, cannot be used to set off against SGST. The balance of ITC under CGST (post set off of CGST liability) will be carried over to the next period.

6. Similarly, the SGST balance after set off of SGST liability will be carried over to the next period.

Example 2 – How can IGST ITC be utilized?

Consider another set of transactions for XYZ Ltd.

Party Name	Destination State	Transaction Type	Product	Input Credit			Tax Liability
				CGST	SGST	IGST	CGST	SGST	IGST
ABC Aluminium Industries Ltd.	Maharashtra	Purchase (Inward Supply)	Aluminium Bars	–	–	30,000	–	–	–
JK Rubber Industries Ltd.	Maharashtra	Purchase (Inward Supply)	Tyres	–	–	10,000	–	–	–
Krishna Spares	Gujrat	Sale (Outward Supply)	Spare Parts	–	–	–	–	–	12,000
A-one Auto Parts	Rajasthan	Sale (Outward Supply)	Spare Parts	–	–	–	24,000	24,000	–

At the end of the month, XYZ Ltd. utilized IGST Input tax credit to set off their tax liability.

As illustrated above,

1. XYZ Ltd. haveIGST Input tax credit of 40,000 and tax liabilities of IGST 12,000, CGST 24,000 and SGST 24,000.

2. As prescribed by Law, IGST Input credit needs to be utilized first to set off IGST tax liability. The remaining ITC can be used to set off CGST and then against the SGST liability, in that order.

3. Xyz Ltd. first utilized IGST ITC to set off IGST liability of 12,000.

4. Remaining IGST ITC credit 28,000 (40,000 – 12,000) is used to set off CGST liability of 24,000.

5. Post this adjustment, the remaining IGST ITC of 4,000 is used to set off SGST liability to the extent of 4,000.

6. Now, after utilization of Input credit available, the SGST liability of Xyz Ltd. is 20,000.

Example 3 – CGST ITC cannot be used for SGST liability

Let us consider another scenario of XYZ Ltd. to illustrate non-utilization of CGST ITC against SGST liability.

XYZ Ltd. had a carry forward balance of CGST Input credit 15,000.

Input Credit balance	Amount
CGST Input Credit	15,000

During the month, outward supply details of Xyz Ltd. are furnished below:

Party Name	Destination State	Transaction Type	Product	Input Credit		Tax Liability
				CGST	SGST	CGST	SGST
A-one Auto Parts	Rajasthan	Sale (Outward Supply)	Spare Parts	–	–	11,000	11,000

As illustrated,

1. XYZ Ltd. utilized CGST Input Credit of previous period 15,000 to set off CGST liability of current period 11,000.

After this set off, XYZ Ltd. has a balance CGST input credit of 4,000.

As prescribed by the Law, excess CGST Input Credit for the period cannot be set off against SGST liability of current period. Similarly, SGST Input Credit cannot set off against CGST liability.

Thus, the balance CGST credit was not utilized, and the SGST liability for Xyz Ltd. for the months is 11,000.

The Set-off mechanism for UTGST is similar to SGST.

About the Author:

Author is practicing chartered accountant in Sirohi (Rajasthan). He can be reached at camukeshkumar16@gmail.com