How to Set Off Input Tax Credit Against Tax Liability in the GST Regime

We introduced Input Tax Credit (ITC) in a previous post.
Now let us understand how to set off your input credit against your tax liability in the GST regime.
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:

Input Tax Credit

Set off against liability

CGST (Central GST)

CGST and IGST (in that order)

SGST (State GST)

SGST and IGST (in that order)

IGST (integrated GST)

IGST, CGST, SGST (in that order)
 
Let us discuss with an example to understand how this works.

Example 1 – How can CGST and SGST ITC be used?
Super Cars Ltd. is a car manufacturer located in Karnataka. The details of transactions effected by Super Cars Ltd. are furnished below along with the tax component:

Party Name

Destination State

Transaction Type

Product

Input Credit

Tax Liability

CGST

SGST

CGST

SGST

Ratna Steels

Karnataka

Purchase (Inward Supply)

Steel

1,20,000

1,20,000

—

—

Ravindra Automobiles

Karnataka

Sale (Outward Supply)

Car

—

—

36,000

36,000

Ravindra Automobiles

Karnataka

Sale (Outward Supply)

Spare parts

 —

 —

90,000

90,000

 
At the end of the month, Super Cars Ltd. adjusts available input credit against their  tax liability.

In the example, Super Cars Ltd. has a tax liability of 12,000. Here is how it happens:

1. Super Cars Ltd. have Input tax credit of 1,20,000 each against CGST and SGST.
2. As prescribed by Law, Super Cars 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 Super Cars 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 Super Cars Ltd.

Party Name

Destination State

Transaction Type

Product

Input Credit

Tax Liability

CGST

SGST

IGST

CGST

SGST

IGST

Shine Aluminium Industries Ltd.

Tamil Nadu

Purchase (Inward Supply)

Aluminium Bars

—

—

30,000

—

—

 —

Lakshmi Rubber Industries Ltd.

Tamil Nadu

Purchase (Inward Supply)

Tyres

 —

 —

10,000

 —

 —

 —

A-1 Spares

Maharashtra

Sale (Outward Supply)

Spare Parts

 —

 —

—

—

—

12,000

Johnson Auto Parts

Karnataka

Sale (Outward Supply)

Spare Parts

—

—

—

    24,000

    24,000

—

 
At the end of the month, Super Cars Ltd. utilized IGST Input tax credit to set off their tax liability.

As illustrated above,

1. Super Cars Ltd. have IGST 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. Super Cars 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 Super Cars Ltd. is 20,000.

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Example 3 – CGST ITC cannot be used for SGST liability
Let us consider another scenario of Super Cars Ltd. to illustrate non-utilization of CGST ITC against SGST liability.
Super Cars Ltd. had a carry forward balance of CGST Input credit 15,000.

Input Credit balance

Amount

CGST Input Credit

15,000

During the month, outward supply details of Super Cars Ltd. are furnished below:
As illustrated,

1. Super Cars Ltd. utilized CGST Input Credit of previous period 15,000 to set off CGST liability of current period 11,000.
2. After this set off, Super Cars Ltd. has a balance CGST input credit of 4,000.
3. 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.
4. Thus, the balance CGST credit was not utilized, and the SGST liability for Super Cars Ltd. for the months is 11,000.

The Set-off mechanism for UTGST is similar to SGST. Click here to know more.