Utilisation of Input Tax Credit (ITC) Under GST

  

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Utilisation of Input Tax Credit (ITC) Under GST: A Comprehensive Guide

Input Tax Credit (ITC) is a cornerstone of India's Goods and Services Tax (GST) system. It allows businesses to offset the tax paid on inputs (purchases) against the tax liability on outputs (sales), thereby reducing the overall tax burden. In this article, we explain how to utilize input tax credit under GST in simple terms, discuss the legal framework, and provide practical tips for managing ITC effectively.

What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) is the mechanism that enables a business to reduce its GST liability by claiming credit for the GST paid on purchases used to produce goods or provide services. In effect, ITC prevents the cascading effect of taxes, ensuring that tax is only paid on the value addition at each stage of the supply chain.

Legal Framework and Key Provisions

The utilisation of ITC under GST is governed by amendments to the CGST Act and related rules. Two critical provisions in this context are:

• Section 49A & 49B of the CGST Act:

  These sections mandate that any ITC on account of integrated tax (IGST) must be fully utilized before credits on CGST or SGST/UTGST are applied. This ensures that interstate tax liabilities are settled before drawing on state-level credits.

• Rule 88A of the CGST Rules:

  Issued via Notification No. 16/2019 (effective from 29 March 2019), Rule 88A prescribes the order of credit utilization. It requires that IGST credits be used first to offset any IGST liability. Any surplus IGST credit can then be applied toward CGST or SGST liabilities, but only after the entire IGST balance has been exhausted.

Order of Utilisation of ITC

The prescribed sequence for set-off of input tax credit under GST is designed to ensure a smooth distribution of tax credits between the Centre and the States:

Utilisation of IGST Credit:

• Primary Application: All available IGST credit must first be used to settle the IGST liability.
• Surplus IGST Credit: If there is any IGST credit remaining after offsetting the entire IGST liability, it can then be applied to reduce either CGST or SGST liabilities in any proportion. The key condition is that the IGST credit must be completely exhausted before any credits on CGST or SGST are utilized.

Utilisation of CGST and SGST Credits:

• CGST Credit: After using all IGST credit, the ITC on account of CGST is applied against the CGST liability.
• SGST Credit: Similarly, SGST credit is used exclusively to offset SGST liability. Credits from one cannot be used to settle the liability of the other.

This sequence is essential to ensure that funds are properly balanced between central and state tax collections.

Practical Example

Consider a taxpayer with the following liabilities and available credits:

Liabilities:

• IGST Liability: ₹1,000
• CGST Liability: ₹1,000
• SGST Liability: ₹1,000

Available ITC:

• IGST Credit: ₹1,300
• CGST Credit: ₹200
• SGST Credit: ₹200

Step 1: Utilize IGST Credit

• The entire IGST liability of ₹1,000 is offset using the available IGST credit, leaving a surplus of ₹300 (₹1,300 - ₹1,000).

Step 2: Allocate Remaining IGST Credit

• The remaining ₹300 of IGST credit can be applied to the CGST and SGST liabilities in any proportion (for example, ₹150 each) or as per the taxpayer's strategy, as long as IGST credit is exhausted first.
• Note:the law does not place any strict rule of attributing entire unutilised IGST credit to CGST or SGST liability. A taxpayer can utilise IGST credit in any proportion and in any order, but the condition is to completely utilise the IGST credit before using CGST or SGST credit.

Step 3: Use Specific Credits if Necessary

• If after using the surplus IGST credit, there is still a remaining liability under CGST or SGST, then the corresponding dedicated credits (CGST or SGST) are utilized.

This example demonstrates the flexibility in the system, as long as the rule to fully use IGST credit first is followed.

Conclusion

The efficient utilisation of input tax credit under GST plays a crucial role in reducing tax liability and ensuring smooth compliance. By following the prescribed sequence—first using IGST credit, then applying CGST and SGST credits—businesses can manage their tax obligations effectively. Strategic adjustments, when necessary, further optimize cash flow and financial performance.

Understanding these mechanisms not only simplifies the GST process but also helps businesses avoid unnecessary tax outflows. It is always recommended to review your electronic credit ledger periodically and, if needed, consult a tax professional to ensure optimal ITC management.

Frequently Asked Questions (FAQs)

1. What is Input Tax Credit (ITC) under GST?

ITC allows businesses to offset the tax paid on inputs against the tax liability on outputs, reducing the overall GST burden.

2. How is ITC utilised under GST?

The prescribed order is to first use IGST credits, and once fully exhausted, apply CGST and SGST credits against their respective liabilities.

3. Why must IGST credits be exhausted first?

This ensures that the interstate tax liability is fully settled before state-level credits are used, balancing central and state collections.

4. Can I use CGST credit to pay off SGST liability?

No, CGST credits can only be used against CGST liability and similarly, SGST credits can only be applied to SGST liability.

5. How can I optimise my ITC utilisation?

Review your electronic credit ledger regularly and consider adjusting the allocation of excess IGST credit to manage cash flow efficiently.

6. What happens if there is surplus IGST credit?

Any surplus IGST credit, after offsetting the IGST liability, can be applied toward CGST or SGST liabilities.

7. Is the ITC utilisation rule mandatory?

Yes, the prescribed order of ITC utilisation under GST is mandatory as per Sections 49A and 49B of the CGST Act and Rule 88A of the CGST Rules.

8. How do I check my available ITC?

You can check your available ITC by logging into the GST portal and reviewing your electronic credit ledger.

9. What if my ITC is not fully utilised?

Unused ITC can be carried forward to the next tax period, but it must be utilised according to the prescribed order in subsequent filings.

10. Does ITC apply to all GST-registered businesses?

Yes, all GST-registered businesses are eligible to claim ITC on eligible purchases, subject to conditions laid down under the GST law.

By understanding the utilisation of input tax credit and following the correct set-off sequence, businesses can significantly reduce their GST liability and improve cash flow management. Stay informed about these indirect tax mechanisms to make the most of your tax credits.

For more tips on GST compliance and tax planning, check out our other articles on GST and income tax updates.