Meaning of Input Tax Credit (ITC)
Input Tax Credit refers to the tax already paid by a person at time of purchase of goods or services and which is available as deduction from tax payable on sale of goods or services. It can be ITC of IGST, CGST & SGST.
ITC Claim
ITC claim means reporting the ITC in your GST Return. ITC can’t be claimed after any of the following happens: –
- after the 30th day of November following the end of the financial year to which such invoice or debit note pertains.
- annual return filed for relevant year (Filing date, not due date)
Once ITC is claimed within time as above, It can be utilized without any time limit.
Order of Utilization of Input Tax Credit (ITC)
The order of utilization of Input tax credit of IGST, CGST & SGST as per Rule 88A is as under: –
SGST, UTGST, CGST And IGST – How ITC Allowed
IGST Credit : Amount of IGST Credit shall first be utilized towards payment of IGST liability and amount remaining, if any, may be utilized towards the payment of CGST liability and STCG or UTGST liability, as the case may be, in any order & in any proportion.
CGST Credit : Amount of CGST Credit shall first be utilized towards payment of CGST liability and amount remaining, if any, may be utilized towards the payment of IGST liability. provided ITC on account of IGST Credit is fully utilized before that. Amount of CGST credit can not be utilized for payment of SGST/UTGST liability.
SGST Credit : Amount of SGST Credit shall first be utilized towards payment of SGST liability and amount remaining, if any, may be utilized towards the payment of IGST liability, provided ITC on account of IGST Credit is fully utilized before that. Amount of SGST credit can not be utilized for payment of CGST/UTGST liability.
Note – With effect from July,2019, the Rule 88A of the CGST Rules was implemented on the GST portal explaining the order of utilization of Input tax credit, taxpayers had to follow the old facility available on the GST portal up to July 2019. The facility was made available from July 2019 returns onwards.
We can understand the above with following table which was issued in Circular No. 98/17/2019-GST dated 23.04.2019
| Input tax Credit on account of | Output liabilityOn account of Integrated Tax | Output liability on account of Central tax | Output liability on account of State tax/Union Territory tax |
| Integrated tax | (I) | (II) – In any order and in any proportion | |
| (III) Input tax Credit on account of Integrated tax to be completely exhausted mandatorily before utilizing ITC of CGST & SGST | |||
| Central tax | (V) | (IV) | Not permitted |
| State tax/Union Territory tax | (VII) | Not permitted | (VI) |
Why you should not use the default method of allocation of credit on the GST Portal?
As per the current default mechanism setup on the GST portal, extra IGST credit will be used to set off any liability under CGST first and then under SGST/IGST. If you generally purchase goods from other state and sold it within your state, then at a certain point of time, you will have a huge CGST credit and low or no SGST Credit. To overcome this situation, generally use remaining IGST credit equally between CGST and SGST liability. If you already have a pile up of CGST credit then you should use IGST credit for setting off SGST liability first.
We can understand the above table by following examples applying it in three Cases below
Example : 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 |
Case 1 – When we utilize the ITC in original default order
| Input tax Credit on account of | Discharge of output liability on account of Integrated tax | Discharge of output liability on account of Central tax | Discharge of output liability on account of State tax/Union Territory tax | Balance of Input Tax Credit |
| Integrated tax | 1000 | 300 | 0 | 0 |
| Input tax Credit on account of Integrated tax has been completely exhausted i.e. Rs.1300/- first for payment of IGST, then for CGST & after then for SGST | ||||
| Central tax | 0 | 0 | – | 200 |
| State tax/Union territory tax | 0 | 200 | 0 | |
| Balance SGST to be paid in Cash | 100 | |||
| Total | 1000 | 300 | 300 | 200 (CGST) |
Case 2 – When we utilize ITC manually as per as per Taxpayer’s choice
| Input tax Credit on account of | Discharge of output liability on account of Integrated tax | Discharge of output liability on account of Central tax | Discharge of output liability on account of State tax/Union Territory tax | Balance of Input Tax Credit |
| Integrated tax | 1000 | 100 | 200 | 0 |
| Input tax Credit on account of Integrated tax has been completely exhausted i.e. first for IGST, then for | ||||
| Central tax | 0 | 200 | – | 0 |
| State tax/Union territory tax | 0 | 100 | 100 | |
| Total | 1000 | 300 | 300 | 100 |
Case 3 – When we utilize ITC of IGST equally in CGST & SGST
| Input tax Credit on account of | Discharge of output liability on account of Integrated tax | Discharge of output liability on account of Central tax | Discharge of output liability on account of State tax/Union Territory tax | Balance of Input Tax Credit |
| Integrated tax | 1000 | 150 | 150 | 0 |
| Input tax Credit on account of Integrated tax has been completely exhausted | ||||
| Central tax | 0 | 150 | 0 | 50 |
| State tax/Union territory tax | 0 | 150 | 50 | |
| Total | 1000 | 300 | 300 | 100 (50 CGST & 50 SGST) |
Observations :
- As we can see in all the above three cases IGST is fully utilized before utilizing the ITC of CGST & SGST so Rule 88A is complied with in all the three cases.
- In Case 1 taxpayer have to pay output SGST of Rs. 100 in cash & ITC (CGST) balance of Rs.200 is unutilized. It is not beneficial for taxpayer as he have to pay Rs. 100 from his working capital funds even if he is having unutilized balance CGST ITC of Rs.200/-
- In Case 2 entire liability is paid through ITC & unutilized ITC (SGST) of Rs.100/-. It may or may not be beneficial to taxpayer depending upon his future tax liability & future ITC of IGST.
How to Take Optimum Credit of ITC
Most beneficial order of utilization of ITC may differ from one taxpayer to another. In most of the cases Order adopted in case 3 above will be beneficial i.e. equal proportion.Because ITC of CGST can be used to pay output IGST & CGST, Similarly ITC of SGST can be used to pay output IGST & SGST.
However It totally depends upon output GST liability & ITC available in different heads i.e. IGST, CGST & SGST. To find out the best option for GST credit, you can check this GST and Setoff Calculator.
Lets understand it with the help of some examples
Example 1
| Particulars | IGST | Balance | CGST | Balance | SGST | Balance | Total |
| Output | 1000 | 300 | 300 | 1600 | |||
| Input | 1300 | 200 | 200 | 1700 | |||
| IGST Utilized | 1000 | 150 | 150 | ||||
| CGST Utilized | 150 | 50 | |||||
| SGST Utilized | 150 | 50 | |||||
| Utilized Balance | 50 | 50 | 100 | ||||
| Payable | 0 |
- Calculate net liability for the period (Total output-Total input =1600-1700=100)
- Order & Proportion of ITC should be in a way that net liability to pay tax is not increased or there should not be any unutilized ITC in one head along with payment in another head.
Example 2
| Particulars | IGST | Balance | CGST | Balance | SGST | Balance | Total |
| Opening Bal | 50 | 50 | 100 | ||||
| Output | 1000 | 500 | 500 | 2000 | |||
| Input | 1500 | 200 | 200 | 1900 | |||
| IGST Utilized | 1000 | 250 | 250 | ||||
| CGST Utilized | 50+200=250 | ||||||
| SGST Utilized | 50+200=250 | ||||||
| Unutilized Balance | 0 | ||||||
| Payable | 0 |
- Net liability for the period (Total output-Total input i.e. Opening Input+Current input)=2000-(1900+100) =0
- In this tax period Taxpayer has op. ITC of both CGST & SGST but as per Rule 88A he first utlized balance ITC of IGST for payment of CGST & IGST & then opening & current ITC of CGST & IGST.
Example 3
| Particulars | IGST | Balance | CGST | Balance | SGST | Balance | Total |
| Opening Bal | 0 | 100 | 0 | 100 | |||
| Output | 1100 | 300 | 300 | 1700 | |||
| Input | 1200 | 200 | 200 | 1600 | |||
| IGST Utilized | 1100 | 100 | |||||
| CGST Utilized | 200 | ||||||
| SGST Utilized | 100+200=300 | ||||||
| Unutilized Balance | 0 | ||||||
| Payable | 0 |
- Net Tax Payable = 1700-(100+1600)=0
- In this period we have used balance ITC of IGST to pay CGST not equally because taxpayer is having opening ITC of SGST, so to utilize that op. SGST above order & proportion will be the most beneficial for the taxpayer in this case.
Amendment in Section- 49
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.
Section 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.
Section 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.
Rule 88A of CGST Rules,2017
New Rule 88A was inserted by Notification16/2019 dated 29-03-2019 in the CGST Rules allows utilization of input tax credit of Integrated tax towards the payment of Central tax and State tax, or as the case may be, Union territory tax, in any order & in any proportion subject to the condition that the entire input tax credit on account of Integrated tax is completely exhausted first before the input tax credit on account of Central tax or State/Union territory tax can be utilized.
It means before utilizing the ITC of CGST & SGST, taxpayer has to check that there is not any balance of ITC of IGST or IGST ITC balance is zero.
Further to clarify this Rule Circular No. 98/17/2019-GST dated 23.04.2019 was issued which clarified that after the insertion of the said rule, the order of utilization of input tax credit will be as per the table given explained in above sections.
