‘One Nation One Tax’ is the motto of the Goods and Services Tax in India. Although, it is called as ‘One Tax’, it is further trifurcated into CGST, SGST & IGST.
Input Tax Credit is an important part of the GST structure which makes GST a ‘cascading-effect’ free tax. This Input Credit can be further utilized to pay off the outward GST liabilities by the taxpayer.
In this short article, we will look at the way in which the ITC is used to pay off the outward SGST, CGST and IGST outward liabilities.
Important GST rules & provisions pertaining to ITC utilization
The rules and circulars related to the ITC utilization method are listed down below:
- Rule 49(5)
- Rule 49A
- Rule 49B
- Rule 88A
- Circular No. 98/17/2019
To explain the gist of the above rules, we will helps this with an example.
Example 1–
There’s a business named ‘Mahesh refineries’. The details of the GST Input Tax Credit available and outward tax liabilities are given in the table below:
| GST Type | ITC Available | Outward Liability |
| IGST | 1,00,000 | 90,000 |
| SGST | 15,000 | 20,000 |
| CGST | 20,000 | 25,000 |
Now to set off the outward liabilities using the available ITC, the following steps have to be followed by the business:
Step 1: Utilize the available IGST Credit completely.
Utilize the available IGST credit completely to pay the outward IGST liabilities.
It is important to nullify the IGST outward liabilities first.
As per the above table Rs. 90,000 of IGST liability will be adjusted from available ITC of Rs. 1, 00,000.
| GST Type | ITC Available | Outward Liability |
| IGST | 10,000 | 00 |
| SGST | 15,000 | 20,000 |
| CGST | 20,000 | 25,000 |
Now, the balance IGST credit can be used in any order and in any proportion to pay off the SGST and CGST liabilities.
In this case, the taxpayer uses his balance IGST in the following proportion:
- 6000 is used to pay the CGST liability
- 4000 is used to pay the SGST liability
Now,
| GST Type | ITC Available | Outward Liability |
| IGST | 00 | 00 |
| SGST | 15,000 | 16,000 |
| CGST | 20,000 | 19,000 |
Step 2: Use the CGST & SGST ITC to settle the corresponding liabilities
In this step, the taxpayer pays:
- the CGST Liability of 19,000 from CGST ITC of 20,000
- the SGST Liability of 15,000 from SGST ITC of 15,000
Now the table looks as follows:
| GST Type | ITC Available | Outward Liability |
| IGST | 00 | NIL |
| SGST | 00 | 1,000 |
| CGST | 1,000 | NIL |
In this example now, there is excess CGST ITC available of Rs. 1,000.
Also, there is a pending outward liability of Rs.1000 for SGST.
Can the CGST ITC used to pay the SGST outward liability?
NO. CGST Input Tax Credit can NEVER be utilized to pay the outward SGST liability
AND
SGST Input Tax Credit can NEVER be utilized to pay the outward CGST Liability.
So what will the taxpayer do in this scenario?
CGST ITC available = 1,000
SGST Outward liability = 1,000
In this example,
- Excess CGST ITC will be carried forward
- Shortfall of SGST outward liability of Rs.1,000 should be paid in cash
To utilize maximum GST Input Tax Credit, taxpayer must have robust GSTR 2B reconciliation software in place to identify the eligible ITC.
Automated reconciliation software increases your reconciliation accuracy and the taxpayer does not have to worry about the GST compliances.
ITC utilization- Best way with example
When taxpayer completely pays off the IGST liabilities using his IGST ITC, the taxpayer can adjust the balance IGST ITC in any proportion to settle the SGST or CGST outward liabilities.
Taxpayers can distribute the balance IGST ITC in 1:1 ratio for CGST and SGST liabilities respectively.
- Based on CGST Input Credit available, IGST credit should be used against the CGST outward liability.
- Based on SGST Input Credit available, IGST credit should be used against the SGST outward liability.
- Taxpayers must keep the MINIMUM liability in either the SGST or the CGST outward liabilities head.
Example 2:
Let us look at our next example:
| GST Type | ITC Available | Outward Liability |
| IGST | 45,000 | 50,000 |
| SGST | 9,000 | 12,000 |
| CGST | 24,000 | 17,000 |
In this example, the outward IGST liability is GREATER than the IGST Input Credit available.
Following the same rules from the previous example:
- First pay the IGST outward liability. Hence, Rs. 45,000 IGST ITC will be utilized to pay off the IGST liability.
Balance IGST liability = Rs. 5,000
- Adjust the SGST liability with available SGST Input credit.
- Adjust the CGST liability with available CGST Input credit.
The revised table will look as follows:
| GST Type | ITC Available | Outward Liability |
| IGST | 00 | 5,000 |
| SGST | 00 | 3,000 |
| CGST | 7,000 | NIL |
Here, there is still pending IGST liability of Rs. 5,000
CGST Input credit available = Rs. 7,000
In this case,
CGST Input Credit CAN BE UTILIZED TO ADJUST THE IGST LIABILITY
Rs. 5000 CGST Input credit will be used to pay the IGST liability of Rs. 5,000.
Table looks like,
| GST Type | ITC Available | Outward Liability |
| IGST | 00 | NIL |
| SGST | 00 | 3,000 |
| CGST | 2,000 | NIL |
Now,
- CGST Input credit of Rs. 2,000 is carry forwarded
- SGST outward liability of Rs. 3,000 has to be paid in cash
Role of GSTR-2B in ITC claim
GSTR-2B plays a vital role in making ITC reconciliation easier.
Form GSTR 2B is the definitive source for claiming maximum & eligible Input Tax Credit.
Details of your purchases shall reflect in your GSTR-2B ONLY if your Supplier has filed his GSTR-1 correctly & on time corresponding to the purchase.
Taxpayers are required to have automated GSTR 2B reconciliation software to run flawless ITC reconciliations.
Following are the benefits of automated ITC reconciliation tools:
- Identify your GST defaulting suppliers.
- Notify the GST non-filers about the mismatch and ask them to file their GSTR-1.
- Claiming ineligible ITC can lead to a GST audit by department.
- Minimum human intervention to eliminate errors
- Detailed reconciliation reports
- When you choose a GST Suvidha Provider like GSTHero, you stay 100% compliant with the dynamic GST laws.
In conclusion
Utilizing the available GST Input Tax Credit to pay off the outward liabilities is explained in this short article.
The detailed process is explained using illustrative examples.
Taxpayers MUST have automated GSTR 2B reconciliation software like GSTHero to run flawless ITC reconciliations.
Stay updated. Stay ahead.
Until the next time…
