GST framework allows businesses to offset the GST ITC against the output tax liability. The utilization of ITC is governed by specific rules outlined in the GST Act. Over time, there have been amendments and updates to these rules, and it’s essential for taxpayers to stay informed about the latest changes to ensure compliance. This article provides a clarity on ITC set-off sequence as per GST Rule 88A clarified in Circular No. 98/17/2019-GST dated 23.04.2019.

1. Summary chart of Order of Utilization of ITC under GST:

After insertion of Rule 88A, the order of utilization of input tax credit (ITC) will be as per the numeric order given below:

Input tax Credit (ITC) on account of Output IGST liability Output CGST liability Output SGST/UTGST
liability
Input IGST (1) (2) – In any order and in any proportion
  (3) Input tax Credit on account of Integrated tax (IGST) to be completely exhausted mandatorily before utilizing CGST and SGST ITC
Input CGST

 

(5) (4) Not permitted
Input SGST/UTGST (7) Not permitted (6)

Latest ITC Set-off Rules of GST

Latest ITC Set Off Rules of GST

2. Relevant Provisions:

  • Rule 88A of CGST Rules, 2017:

Rule 88A was inserted in the CGST Rules, 2017 vide Notification No. 16/2019- Central Tax, dated 29th March, 2019. The amended provisions came into effect from 1st April 2019. The Board clarified that:

    • ITC on account of IGST shall first be utilised towards payment of IGST, and the amount remaining, if any, may be utilised towards the payment of CGST and SGST or UTGST, as the case may be, in any order.
    • Provided that the ITC on account of CGST, SGST or UTGST shall be utilized towards payment of IGST, CGST, SGST or UTGST, as the case may be, only after the ITC available on account of IGST has first been utilized fully.
  • Section 49A and Section 49B :

Section 49 was amended and Section 49A and Section 49B were inserted vide CGST (Amendment) Act, 2018. The amended provisions came into effect from 1st February 2019.

    • As per Sec 49A, ITC on account of CGST, SGST or UTGST shall be utilized towards payment of IGST, CGST, SGST or UTGST, as the case may be, only after the ITC available on account of IGST has first been utilized fully towards such payment.
    • As per Sec 49B the Government may, on the recommendations of the Council, prescribe the order and manner of utilization of the ITC on account of IGST, CGST, SGST or UTGST, as the case may be, towards payment of any such tax.

3. Illustration:

The following illustration given in circular would further amplify the impact of newly inserted rule 88A of the CGST Rules related to off-set of ITC:

Amount of Input Tax Credit available and output liability under different tax heads:

Head Output Liability Input tax Credit
Integrated tax 1000 1300
Central tax 300 200
State tax / Union Territory tax 300 200
Total 1600 1700

Please note that the following options are for understanding purpose only, you may choose any one option and you may change proportion of Input IGST utilization against CGST and SGST liability in any order to optimize utilization of ITC in such a way that minimum cash liability arrives after Set-off.

  • Option 1 : GST Portal Default offset functionality
If Balance IGST ITC first utilized against Output CGST
Particulars Total ITC Output IGST Output CGST Output SGST Balance ITC
Output Tax Liability 1000 300 300
Less: ITC Used- IGST 1300 1000 300 0 0
Less: ITC Used- CGST 200  0 0  0 200
Less: ITC Used- SGST 200  0  0 200 0
Balance Output Liability to be paid through cash ledger   0 0 100  

Remarks: Option 1 is not beneficial as we cannot utilize ITC of CGST against SGST, Due to this cash liability payable of Rs. 100 under SGST and unutilized ITC of Rs. 200 under CGST head.

Note: Input tax Credit on account of Integrated tax has been completely exhausted before utilizing CGST and SGST ITC. Practical aspect of GST Portal: The GST portal’s GSTR-3B Default offset functionality utilize ITC as per above mentioned sequence i.e on the basis of Option 1. But we can manually modify the ITC offset figures in order to optimize ITC utilization as described below in Option 2.

  • Option 2 : Utilized Equally
If Balance IGST ITC utilized equally against Output CGST and SGST
Particulars Total ITC Output IGST Output CGST Output SGST Balance ITC
Output Tax Liability 1000 300 300
Less: ITC Used- IGST 1300 1000 150 150 0
Less: ITC Used- CGST 200  0 150  0 50
Less: ITC Used- SGST 200  0  0 150 50
Balance Output Liability to be paid through cash ledger   0 0 0  

Remarks : Option 2 is beneficial to taxpayers than Option 1 as we have Utilized IGST ITC against CGST and SGST equally, cash liability is Nil and unutilized ITC is Rs. 50 under CGST and Rs. 50 under SGST.

Note : Input tax Credit on account of Integrated tax has been completely exhausted before utilizing CGST and SGST ITC. Practical aspect of GST Portal: The GST portal’s GSTR-3B offset functionality offset ITC on the basis of Option 1. But we can manually modify the offset figures in order to optimize ITC utilization as described above in Option 2.

  • Option 3 : Utilized in any order as per taxpayer’s choice
If Balance IGST ITC utilized in order 2:1 against Output CGST and SGST respectively
Particulars Total ITC Output IGST Output CGST Output SGST Balance ITC
Output Tax Liability 1000 300 300
Less: ITC Used- IGST 1300 1000 200 100 0
Less: ITC Used- CGST 200  0 100  0 100
Less: ITC Used- SGST 200  0  0 200 0
Balance Output Liability to be paid through cash ledger   0 0 0  

Remarks: Option 3 is not suggested as cash liability is Nil but unutilized ITC is Rs. 100 under CGST and we cannot offset CGST ITC against SGST ITC.

Note: Input tax Credit on account of Integrated tax has been completely exhausted before utilizing CGST and SGST ITC.

Conclusion:

In above illustration, we can conclude that Option 2 is better out of all 3 options. So, according to author taxpayers should identify beneficial order of ITC utilization in their specific case as per above specified rules in order to optimize ITC utilization in such a way that minimum cash liability arrives after ITC off-set.

The systematic utilization of Input Tax Credit is integral to GST compliance. By adhering to the sections and rules outlined in the GST Act, businesses can optimize their tax liabilities while ensuring transparency and accuracy in the credit mechanism. Regular updates and adherence to the prescribed timelines for ITC utilization contribute to a seamless and efficient GST process.

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DISCLAIMER: This publication is merely a general guide meant for knowledge purposes only. All the references or content are for educational purposes only and do not constitute a legal advice. We do not accept any liabilities whatsoever for any losses caused directly or indirectly by the use/reliance of any information or conclusion contained in this publication. Prior to acting upon this publication, you’re suggested to seek the advice.

Author Bio

Qualification: CA in Practice
Company: C P Agrawal and Associates
Location: New Delhi, Delhi, India
Member Since: 08 Dec 2022 | Total Posts: 6
CA Pinky Jain is a partner of C P Agrawal & Associates. She is a qualified Chartered Accountant and associate member of Institute of Chartered Accountants of India. She also holds master’s degree in commerce and has expertise in handling Direct & Indirect taxation matters and financial adv View Full Profile

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