Input Tax Credit under GST: A Guide on Order of Utilisation and GST IST Set-Off Rules

The government altered the procedure for the order of set-off of the same with effect from 29th March 2019. In order to maximise the distribution between the state and the centre, new regulations were established to lower the balance under IGST credits. However, the enterprises may find themselves with larger working capital requirements if the mechanism is not understood and off-set is not optimised. Therefore, it's critical to comprehend how to maximise input tax credit, how it affects businesses, and what sequence to use it. In this article, we will share a detailed overview of the order of utilisation of GST and ITC set-off rules.

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Table of Content

What is TIN in India?

Who Must Get a Taxpayer Identification Number?

Why is TIN Needed?

Steps to Apply for TIN in India

Documents Required to Apply for TIN

Finding the Status of TIN Application

TIN Number Search

Difference Between TIN and GSTIN

Conclusion

Most Asked Questions

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Order of ITC Set-Off: The Amended Law

The sequence in which ITC is used for each tax head has been clarified by CGST Circular No. 98/17/2019, which was released on April 23, 2019. It also said that up until July 2019, taxpayers were required to use the GST portal's functionality in order for Rule 88A of the CGST Rules to be put into effect. The facility was opened for use as of July 2019 returns.

New Sections of the CGST Act: 

• Section 49A: Despite the provisions of Section 49, the input tax credit available for central, state, or union territory taxes must be fully utilised before it can be applied to the payment of integrated taxes, central, state, or union territory taxes, as applicable. This is true even if Section 49 is not followed.

• Section 49B: As per the recommendations of the Council, the Government may specify the sequence and method of applying the input tax credit towards the payment of any integrated tax, central tax, state tax, or union territory tax, as applicable, notwithstanding anything in this Chapter and subject to the provisions of clauses (e) and (f) of sub-section (5) of section 49.

Rule 88A: Input tax credit utilisation order

On March 29, 2019, CT notification no. 16/2019 was issued to notify of the aforementioned amended provision, and rule 88A was thereafter introduced. Any remaining money, if any, may be applied to the payment of central tax, State tax, or Union territory tax, as applicable, in any order. - Input tax credit resulting from integrated tax must be used first to pay integrated tax. As long as the input tax credit available on account of integrated tax has first been fully utilised, it can be used to pay integrated tax, central tax, state tax, or union territory tax, as applicable. No other taxes may be deducted from the input tax credit.

Order of Utilization of ITC under Rule 88A

• IGST Credit: The amount of the credit will be applied first to the payment of the IGST liability. Any remaining credit, if any, will be applied in any order and in any proportion to the payment of the CGST liability, the STCG liability, and the UTGST liability, as applicable.

• CGST Credit: The amount of the credit will be used first for the payment of the CGST liability; any remaining credit, if any, will be applied to the payment of the IGST liability. as long as the ITC associated with the IGST Credit is used up in full before then. The SGST/UTGST due cannot be paid with the amount of CGST credit.

• SGST Credit: If ITC on account of IGST Credit is entirely used before then, the amount of SGST Credit shall be applied first towards the payment of SGST liability. Any residual amount, if any, may be applied towards the payment of IGST liability. Payment of CGST/UTGST liability cannot be made with the amount of SGST credit.

The following table illustrates this order:

ITC for:	Output liability for Integrated tax	Output liability for Central tax	Output liability for State tax
Integrated tax	(I)	(II) – In any order and any proportion
			(III) ITC on account of Integrated tax to be completely exhausted mandatorily
Central tax	(V)	(IV)	Not permitted
State tax/Union Territory tax	(VII)	Not permitted	(VI)

The new regulations mandate that before utilising ITC on CGST or SGST, the whole amount of IGST that is available in the electronic credit ledger must be used. After using the same for IGST output, the sequence in which the IGST ITC is set off can be proportionate and directed towards the output of CGST or SGST.

Implications of the New GST ITC Set-Off Rules

It has been made clear by Circular No. 98/17/2019, dated 23 April 2019, that, in accordance with Section 49 of the CGST Act, integrated tax credits must be used first for integrated tax payments, followed by central tax payments and state tax payments, in that mandatory order. 

This resulted in a situation where, in some situations, a taxpayer had to use an electronic cash ledger to pay off his tax liability for one type of tax (such as State tax), but the electronic credit ledger would not use the input tax credit for another type of tax (such as Central tax). According to the recently added rule 88A to the CGST Rules, input tax credits from integrated taxes may be used in any order to pay for central, state, or union territory taxes, depending on the situation. However, the input tax credits from integrated taxes must be fully used up before any further credits from central, state, or union territory taxes may be applied.

Maximum ITC To Be Utilized for GST Set-Off

Certain taxpayers will not be allowed to use the ITC balance found in the computerised credit ledger to pay off more than 99% of their tax bill for a given tax period as of January 1, 2021. It implies that a cash payment of at least 1% of the tax liability is required. It is applicable to taxpayers whose monthly taxable supply value exceeds Rs. 50 lakh (if the supplies are neither zero-rated nor exempt). There are some taxpayers who are not subject to this restriction:

• A registered taxpayer who has paid over Rs. 1 lakh in income tax in the last two fiscal years through delayed IT returns, either on their own behalf or as the proprietor, managing director, trustee, board, or any two of their partners.

• A registered taxpayer who, as a result of zero-rated supplies made without paying tax or under an inverted tax structure, received more than Rs. 1 lakh as a return of unutilised input tax credit under GST.

• Using solely his electronic cash ledger, a registered taxpayer paid more than 1% of his GST liability for each of the tax periods thus far in the current fiscal year.

• Statutory entities, PSU, local governments, and government departments, among others.

Working of GST Set-Off: Illustrations

Illustration I: Comprehending the IGST credit set-off order

The only difference in the way IGST credit is used is procedural. Let's look at an example to have a practical understanding of the set-off. Assume that Mr. X has the following inputs and liabilities for GST.

Type of GST	Output Liability	ITC
IGST	Rs. 500	Rs. 2000
CGST	Rs. 1000	Rs. 150
SGST/ UTGST	Rs. 1000	Rs. 150
Total	Rs. 2500	Rs. 2300

Set-off under the existing system is shown in the table below:

Type of Tax	Liability	ITC Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 2,000	Rs. 500 (from IGST)	_	_
CGST	Rs. 1,000	Rs. 150	Rs. 150 (from CGST)  Rs. 850 (from IGST)	–	–
SGST/ UTGST	Rs. 1,000	Rs. 150	Rs. 150 (from SGST)  Rs. 650 (from IGST)	Rs. 200	–

As you can see, in order to receive CGST or SGST credit, the CGST or SGST payable must be paid in full first. 

Nonetheless, in accordance with the revised set-off procedure, the available IGST credit must be set off. There are three ways that this can be accomplished: 

Case 1: Full offset of unused IGST credit against CGST

Type of Tax	Liability	ITC Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 2,000	Rs. 500 (from IGST)	_	_
CGST	Rs. 1,000	Rs. 150	Rs. 1000 (from IGST)	–	Rs. 150
SGST/ UTGST	Rs. 1,000	Rs. 150	Rs. 500 (from IGST)  Rs. 150 (from SGST)	Rs. 350	–

Case 2: Full offset of unused IGST credit against SGST

Type of Tax	Liability	ITC Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 2,000	Rs. 500 (from IGST)	_	_
CGST	Rs. 1,000	Rs. 150	Rs. 500 (from IGST)    Rs. 150 (from CGST)	Rs. 350	_
SGST/ UTGST	Rs. 1,000	Rs. 150	Rs. 1000 (from IGST)	–	Rs. 150

Case 3: Unused IGST credit is partially offset against CGST and SGST liabilities in an equal amount.

Type of Tax	Liability	ITC Available	Set-off of Liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 2,000	Rs. 500 (from IGST)	_	_
CGST	Rs. 1,000	Rs. 150	Rs. 750 (from IGST)    Rs. 150 (from CGST)	Rs. 100	_
SGST/ UTGST	Rs. 1,000	Rs. 150	Rs. 750 (from IGST)  Rs. 150 (From SGST)	Rs. 100	_

Taxpayers are free to use the IGST credit in any amount and in any sequence, but they must use it all up before utilising the CGST or SGST credit. As you can see from the example, the new set-off mechanism requires that IGST credit be used first before CGST, SGST, or UTGST may be set off. In order to maximise credit utilisation, it is recommended to adhere to Scenario 3.

Illustration 2: Showing the Impact of the New ITC Set-Off Rules on Businesses

Illustration 1 shows that the total GST output obligation was greater than the total GST input. In this instance, however, the total GST input will be greater than the total GST output. Assume Mr. X has the following input credit and liability for a given tax period:

Type of GST	Output Liability	ITC
IGST	Rs. 500	Rs. 1,000
CGST	Rs. 500	Rs. 300
SGST/ UTGST	Rs. 500	Rs. 300
Total	Rs. 1500	Rs. 1600

Case 1: Full offset of unused IGST credit against CGST

Type of GST	Liability	ITC available	Set-off of liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 1,000	Rs. 500 (from IGST)	–	–
CGST	Rs. 500	Rs. 300	Rs. 500 (from IGST)	–	Rs. 300
SGST/ UTGST	Rs. 500	Rs. 300	Rs. 300 (from SGST/ UTGST)	Rs. 200	–

Case 2: Full set-off of unused IGST credit towards SGST

Type of GST	Liability	ITC available	Set-off of liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 1,000	Rs. 500 (from IGST)	–	–
CGST	Rs. 500	Rs. 300	Rs. 300 (from CGST)	Rs. 200	–
SGST/ UTGST	Rs. 500	Rs. 300	Rs. 500 (from IGST)	–	Rs. 300

Case 3: Set-off of unused IGST credit in part in an equal amount against CGST and SGST obligation

Type of GST	Liability	ITC available	Set-off of liability	Balance to be paid in cash	Balance credit available
IGST	Rs. 500	Rs. 1,000	Rs. 500 (from IGST)	–	–
CGST	Rs. 500	Rs. 300	Rs. 250 (from IGST)    Rs. 250 (from CGST)	–	Rs. 50
SGST/ UTGST	Rs. 500	Rs. 300	Rs. 250 (from IGST)    Rs. 250 (from SGST)	–	Rs. 50

Taxpayers are free to use the IGST credit in any amount and in any sequence, but they must use it all up before utilising the CGST or SGST credit. In the first two cases, the taxpayer must pay either CGST or SGST, and the Electronic Credit Ledger (ECL) will either have a balance of CGST credit or SGST credit. However, in the event that the taxpayer chooses option number three, there is no requirement for him to pay the full amount of his CGST and SGST liabilities in cash. Additionally, he is able to carry forward the equivalent amount of CGST and SGST in ECL, meaning that should the purchase or sales pattern shift in the future from interstate to intrastate or vice versa, having an equal balance in both ledgers will aid in maximising the use of credits. It is necessary to closely monitor this measure.

What Business Owners Should Know?

Let's talk about the specific effects this has on your business. Before applying the CGST or SGST input credit, the revised GST offset regulations require that the IGST input credit be fully utilised. When comparing the taxpayer's credit for interstate purchases to that of intrastate purchases, we can see that in case 2. As a result, sales within the state are higher than those outside of it. As a result, additional IGST input credit accumulates. Therefore, improper use of this could result in a working capital bottleneck.

The taxpayer is clearly delaying the use of the corresponding CGST or SGST credit amount across a number of tax periods if they choose to proceed with any of the two cases 1 or 2 in Illustration II. A significant amount of working capital is blocked as a result for a while. Alternatively, in order to fully utilise the balance credit of CGST or SGST brought forward, the taxpayer should hold off until a later date when his interstate sales (IGST liabilities) exceed intrastate sales. The taxpayer can avoid paying taxes and the potential blockage of working capital if he chooses case 3, using available credit in an equal amount for both CGST and SGST. On the other hand, the government views the new provision as an urgent step towards facilitating the equitable allocation of IGST money.

Conclusion

Taxpayers can manually deduct the input tax credit from their output liabilities using the GST site. It is recommended that taxpayers carefully allocate their available ITC credits each tax period in order to maximise their benefit. If appropriately optimised, the new off-set technique does not result in higher working capital requirements than the previous system. In addition, it is highly recommended that, while carrying over credits, you maintain equal credits in the CGST and SGST/UTGST ledgers in order to maximise credits going forward. The simplest method for doing this is to use the remaining IGST credits for CGST/SGST credits in the same proportion as you used them for the IGST liabilities.

FAQ

Q1. What does GST set-off mean? 

Businesses can use the output tax credit or output tax set-off system to offset the GST they have earned (output tax) against the GST they have paid (input tax). Stated differently, it permits companies to offset or subtract the GST they have already paid on purchases from the GST they still owe the government on sales.

Q2. What is the order of ITC utilisation? 

The amount of the IGST credit will be applied first to the payment of the IGST liability. Any remaining credit, if any, will be applied in any order and in any proportion to the payment of the CGST liability, the STCG liability, and the UTGST liability, as applicable.

Q3. What is the time limit for ITC utilisation?

The buyer has 180 days from the invoice date to make payment for the supply of goods and/or services. If they do not, the government will get the ITC that has already been claimed in addition to the interest that is owed under Section 50. Once the supplier has been paid, the ITC claim may be submitted once more.

Q4. What are the ITC set-off rules?

According to Rule 88A, IGST liabilities should be paid off with ITC credits first. The remaining IGST credit can then be used in any order to pay CGST, SGST, and UTGST liabilities.

Q5. What are IGST set-off rules in 2023?

As per Budget 2023, Taxpayers are free to use the IGST credit in any amount and in any sequence, but they must use it all up before utilising the CGST or SGST credit. As you can see from the example, the new set-off mechanism requires that IGST credit be used first before CGST, SGST, or UTGST may be set off.

Q6. Can we use CGST and SGCT credit against IGST?

Use of CGST credit is limited to situations when IGST credit is unavailable. Input tax credit for SGST and UTGST must be applied to the payment of SGST and UTGST liabilities first. Any residual credit, if any, may then be applied to the payment of IGST liabilities (assuming no CGST credit is available).