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:

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:

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.

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.

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

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 [email protected]