How is Input Tax Credit (ITC) utilized?

CA Hema Pandey | Last updated: 27 November 2020

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Quick Summary

Input Tax Credit (ITC) is a valuable credit available to GST-registered individuals upon paying Input Tax. This credit resides in your Electronic Credit Ledger and can be used to offset your output tax liability. This article explains the specific order in which different types of ITC, such as IGST, CGST, and SGST/UTGST, must be utilised against your GST payments.

Input Tax Credit (hereinafter referred to as ITC) is credit available to a person registered under GST on payment of Input Tax. This amount is available in his Electronic Credit Ledger which he can adjust against his output tax liability.

Please note that in this article we are not concerned about Electronic Cash Ledger

In this article, we will understand the manner to utilize ITC available under various heads of GST.

Section 49(5): Adjustment of ITC

IGST/CGST/SGST/UTGST available in electronic credit ledger can be adjusted in the following sequence: -

Order of Preference

The ITC available in the Electronic credit ledger MUST be utilized in the above-mentioned order. For example, IGST will first be utilized against IGST payable, then against CGST payable, and then if any balance remains then against SGST or UTGST as the case may be.

How to Utilise Input Tax Credit (ITC) in GST

Few Important points

SGST / UTGST credit can be adjusted against only that state of UT's SGST / UTGST.
ITC i.e. Electronic Credit Ledger balance CANNOT be utilized for payment of interest or penalty. For that, we can use the Electronic Cash Ledger Balance. If there is no balance in the cash ledger, we have to first add the balance and then we can pay Interest or penalty.
As per section 49(5)(e), CGST cannot be utilized for payment of SGST/UTGST.
As per section 49(5)(e), SGST/UTGST cannot be utilized for payment of CGST.
As per section 49A, CGST/SGST/UTGST can be utilized for setting-off IGST/CGST/SGST/UTGST only after IGST credit is fully utilized.

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FAQ :

Input Tax Credit (ITC) is a credit available to a person registered under GST on payment of Input Tax. This amount is held in their Electronic Credit Ledger and can be used to offset their output tax liability.

ITC must be utilised in a specific order: IGST credit is used first against IGST payable, then CGST payable, and finally SGST or UTGST payable. CGST credit is used against CGST payable, then IGST payable. SGST/UTGST credit is used against SGST/UTGST payable, then IGST payable.

No, SGST/UTGST credit cannot be utilised for the payment of CGST. Similarly, CGST cannot be utilised for the payment of SGST/UTGST.

No, the ITC balance in the Electronic Credit Ledger cannot be used for the payment of interest or penalties. For these, you must use the Electronic Cash Ledger balance.

As per Section 49A, CGST, SGST, or UTGST can only be used for setting off IGST, CGST, SGST, or UTGST after the IGST credit has been fully utilised.