The January 2026 change in GST rules marks a significant shift in how taxpayers can utilise their input tax credits (ITC). Under the earlier framework, Section 49 of the CGST Act and portal validations required a strict sequence: IGST ITC had to be fully utilised first, and only after exhausting IGST credit could CGST ITC be applied against IGST, followed by SGST ITC once CGST was exhausted. This rigid order often limited flexibility and created situations where taxpayers had to pay cash despite having available credits in their ledgers.
From February 2026 onwards, the GST portal has introduced greater operational freedom. Once IGST ITC is fully exhausted, taxpayers can now use CGST and SGST ITC to pay IGST liability in any sequence - CGST first, SGST first, or any combination depending on their preference. The portal may suggest available balances, but it will not enforce a fixed order, thereby empowering taxpayers to optimise utilisation based on their own working capital needs. We explain the change as under –
Old Rule (Before Jan 2026)
| Step | Liability | ITC Utilised | Balance Liability | Remarks |
| 1 | IGST ₹1,00,000 | IGST ITC ₹50,000 | ₹50,000 | IGST ITC must be fully used first |
| 2 | IGST ₹50,000 | CGST ITC ₹40,000 | ₹10,000 | CGST ITC applied next |
| 3 | IGST ₹10,000 | SGST ITC ₹10,000 | Nil | SGST ITC used only after CGST exhausted |
New Rule (From Jan 2026)
| Step | Liability | ITC Utilised | Balance Liability | Remarks |
| 1 | IGST ₹1,00,000 | IGST ITC ₹50,000 | ₹50,000 | IGST ITC exhausted first |
| 2 | IGST ₹50,000 | CGST ITC ₹30,000 + SGST ITC ₹20,000 | Nil | Taxpayer free to choose sequence |
| Alternative | IGST ₹50,000 | CGST ITC ₹40,000 + SGST ITC ₹10,000 | Nil | Any combination allowed |
The evolution of GST input tax credit (ITC) utilisation rules reflects a gradual shift from rigid statutory sequencing toward operational flexibility. Initially, Section 49 of the CGST Act mandated a strict order: IGST credit had to be fully utilised first, followed by CGST and then SGST, which often forced taxpayers to pay cash for one type of tax while credits in another ledger remained idle. In 2019, Circular 98 and Rule 88A introduced partial flexibility by allowing IGST credit, once exhausted, to be applied toward CGST and SGST in any order, though the IGST-first principle remained mandatory. Sections 49A and 49B reinforced this requirement, ensuring IGST credit had to be fully exhausted before CGST or SGST credits could be used, with portal validations enforcing the sequence. GST ITC Utilisation Evolution Matrix can be summarized as under –
| Period / Provision | Legal Basis | Rule for Utilisation |
| Pre–2019 | Section 49 (CGST Act) | IGST ITC → IGST → CGST → SGST (fixed order) |
| 2019 (Circular 98 + Rule 88A) | Notification 16/2019, Rule 88A | IGST ITC first → then CGST/SGST in any order |
| 2019–2025 (Sections 49A & 49B) | Inserted provisions | IGST ITC must be fully exhausted before CGST/SGST ITC can be used |
| Feb 2026 onwards (Portal Change) | GSTN Advisory Jan 30, 2026 | After IGST ITC exhaustion for IGST Liability payment, taxpayers may thereafter use CGST/SGST ITC in any sequence |
CAclubindia
