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Input Tax Credit under GST: Proper Manner of Utilisation with Example

Needless to say, Input Tax Credit under GST is the most discussed topic from the GST structure. It is an important part of every taxpayer’s journey with GST and at the same time difficult to understand sometimes.

In this article, we will be focusing on one specific topic under the Input Tax Credit umbrella, i.e. ‘Manner of the utilization of Input Tax Credit under GST with example’.

Even if GST is considered to be a ‘One Nation, One Tax’ however, GST has been trifurcated into 3 different categories:

  • CGST
  • SGST
  • IGST

Therefore taxpayer is required to pay correct tax as well as utilize Input Tax Credit (ITC) as about the provisions for all these 3 categories.

That is where Input Tax Credits becomes somewhat haywire to understand and claim accurately.

In this article, we have tried to educate the taxpayers about the proper method to utilize their GST Input Tax Credit.

Utilization of Input Tax Credit Under GST: Rules & Provisions

Following are the Rules and circulars which talk about the ‘Proper manner of utilization of Input Tax credit Under GST’.

  • Rule 49(5)
  • Rule 49A
  • Rule 49B
  • Rule 88A
  • Circular No. 98/17/2019

All these rules pertain to the utilization of GST Input Tax Credit against the GST liabilities.

Let’s look at an example to understand this clearly.

Example 1:

GST LIABILITY

The representation of the above example can be tabulated as follows:

A business named ‘Jethalal Traders’ has the following ITC available and Output Tax Liabilities:

GST Type ITC Available Output Liability
IGST 1,00,000 90,000
SGST 15,000 20,000
CGST 20,000 25,000

Now for utilizing the available Input Tax Credit to adjust the outward liability, the following channel has to be used:

  1. First, the available IGST credit has to be utilized completely.
    • First, utilize the available IGST credit against the outward IGST

          It is very important that first, you Nullify the IGST outward liability.

          From the table, the 90,000 IGST liability will be adjusted from the ITC available of 1,00,000.

          After this utilization, IGST credit available = 10,000

    • Now, this balance IGST credit can be used in any order and in any proportion to settle the SGST Liability and the CGST liability.

         Now, ‘Jethalal Traders’ uses his balance IGST ITC in the following way:

      • 6000 is paid to the CGST liability
      • 4000 is paid to the SGST liability

Now, the updated table will look as follows:

GST Type ITC Available Output Liability
IGST Nil Nil
SGST 15,000 16,000
CGST 20,000 19,000

Now, in the 2nd step, he pays:

    • the CGST Liability of 19,000 with his available CGST ITC of 20,000
    • the SGST Liability of 15,000 with his available CGST ITC of 15,000

Now the table looks like this:

GST Type ITC Available Output Liability
IGST Nil Nil
SGST Nil 1,000
CGST 1,000 Nil

Now, there is an excess CGST Input Tax Credit of 1,000 available.

Also, there is an SGST outward liability of 1,000.

So can these two entries be adjusted against each other?

NO, CGST Input Tax Credit can NEVER be utilized under SGST Liability AND SGST Input Tax Credit can NEVER be utilized under CGST Liability.

So, what can be done in this scenario?

CGST ITC available = 1,000

SGST Outward liability = 1,000

In this case,

  1. Excess ITC of CGST will be carry forwarded.
  2. Shortage of SGT outward liability of 1,000 should be paid by the business.

To have maximum Input Tax Credit at your disposal, you must have a very robust system in place. This GST Filing software will make your process easier by automating many of the steps thus reducing time and increasing the efficiency of the reconciliation.

Related Articles:

ITC Utilization under GST – Best Strategies

After nullifying the IGST outward liability, a taxpayer can adjust the balance IGST ITC in any proportion or order against the CGST and SGST liabilities.

However, it is advised that the taxpayers distribute the balance IGST ITC in a 1:1 ratio for SGST & CGST respectively.

  • Based on CGST credit available, IGST Credit is to be used against CGST Liability
  • Based on SGST credit available, IGST Credit is to be used against SGST Liability
  • The final target should be to keep MINIMUM liability in either the SGST or CGST front.

Claiming eligible ITC is very important and for that the role of ITC Reconciliation under GST becomes necessary.

Tax experts advise using an advanced ITC reconciliation tool to claim 100% eligible Input Tax Credit under GST.

Example 2:

Let’s take a look at another possible scenario:

GST Type ITC Available Output Liability
IGST 45,000 50,000
SGST 9,000 12,000
CGST 24,000 17,000

Now, in this case, the outward IGST liability is GREATER than the IGST ITC available.

Follow the same rule:

  1. Pay off the IGST liability first. Hence, 45,000 will be adjusted against the 50,000 liability. – Balance IGST liability = 5,000.
  2. Adjusting SGST liability with available SGST credit.
  3. Adjusting CGST liability with available CGST credit.

The table will now look as follows:

GST Type ITC Available Output Liability
IGST Nil 5,000
SGST Nil 3,000
CGST 7,000 Nil

Now, there is still IGST liability of 5,000.

CGST ITC available is 7,000.

In this case, the CGST ITC credit can be used to adjust the IGST liability.

5000 CGST credit will be used to offset the IGST liability of 5,000.

The table will look as:

GST Type ITC Available Output Liability
IGST Nil Nil
SGST Nil 3,000
CGST 2,000 Nil

As we know that, SGST liability can NEVER be offset by CGST ITC & vice-versa.

In this case,

  1. CGST ITC of 2,000 is carry forwarded
  2. SGST outward liability of 3,000 has to be paid by the taxpayer for that month.

To Conclude

Utilization of your Input Tax Credit to offset your outward tax liability is not a very difficult job.

 We have explained the detailed process with the help of examples.

To have maximum Input Tax Credit available with you, your reconciliation should be perfect and errorless. Using ITC reconciliation software will help you in doing so.

Stay updated. Stay ahead.

Until the next time…

TaxClue Team

Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building. TaxClue is a team of young professionals. We started in December 2016 with the mission of knowledge sharing. TaxClue would like to hear your valuable suggestion. Please write to our editorial team at info@taxclue.in

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