How input tax credit is utilised to pay tax liability under GST law

Utilization of input tax credit under GST law provisions are specified in section 49(5), 49A and 49B of the CGST Act, 2017, rule 88A of the CGST Rules and Circular Number 98/17/2019 GST dated 23.04.2019. A registered person depending on the nature of supplies, is entitled for input tax credit (ITC) of central tax, state tax or union territory tax and integrated tax.

As per section 49(5) of CGST Act, 2017, input tax credit available in the electronic credit ledger of the registered person on account of;

• Integrated tax (IGST) shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised in any following order towards the payment of 
  • Central tax (CGST);
  • State tax (SGST) / Union territory tax (UTGST)
• The central tax (CGST) shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of integrated tax (IGST)
• The state tax (SGST) shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards payment of IGST. However, input tax on account of SGST shall be utilized towards payment of IGST only where the balance of the input tax credit on account of CGST is not available for payment of IGST.
• The union territory tax shall first be utilised towards payment of UTGST and the amount remaining, if any, may be utilised towards payment of IGST. However, input tax credit on account of UTGST shall be utilised towards payment of IGST only where the balance of the input tax credit on account of CGST is not available for payment of IGST.

We have following two restrictions in utilising GST;

• The central tax (CGST) shall not be utilised towards payment of state tax (SGST) or union territory tax (UTGST); and
• The state tax (SGST) or union territory tax (UTGST) shall not be utilised towards payment of central tax (CGST).
• The input tax credit on account of CGST, SGST/UTGST shall be utilised towards payment of IGST, CGST, SGST or UTGST, as the case may be, only after the input tax credit available on account of IGST has first been utilised fully towards such payment.

In case of imported purchases, IGST based on the product imported is charged. In such cases, the IGST charge can be claimed as input tax credit while paying output GST.

Steps in utilisation of input tax credit under GST

On the basis of above discussion here are the steps for utilisation of ITC;

1. Utilise input tax credit of IGST against IGST liability
2. Balance IGST credit, if any, remaining after utilising IGST liability at step 1, should be utilised against output CGST liability and SGST/UTGST liability. In step 2, you can first utilise IGST credit against CGST or SGST/UTGST, in any order and in any proportion as we don’t have any restriction on the order and proportion of use. However, you have to make sure that IGST credit is completely exhausted before moving to step 3.
3. Utilise CGST credit against output tax liability of CGST, if any left out after step 2. 
4. Utilise input tax credit of CGST against output tax liability of IGST, if any left out after step 3.Please note, ITC of CGST is not allowed to be utilised against output SGST/UTGST liability.
5. Input tax credit of SGST/UTGST after step 4 should be first utilised against output SGST/UTGST liability, if any.
6. Balance input tax credit of SGTS/UTGST can be utilised for payment of output IGST liability, if any left out. Please note, ITC of SGST is not allowed to be utilised against output tax liability of CGST.

Therefore, the main restrictions are;

• CGST credit cannot be used for payment of SGST/UTGST.
• SGST/UTGST credit cannot be utilised for payment of CGST.
• IGST credit shall be fully exhausted before utilizing the CGST credit and SGST credit.

Table showing order of utilisation of ITC