Order of Utilisation of Input Tax Credit Under GST

• IGST credit must be fully utilised first before using CGST or SGST credit.
• Manual allocation of ITC can help reduce unnecessary cash outflow.
• Default GST portal allocation may not be optimal; businesses should adjust ITC manually.
• ITC must be claimed before 30th November of the following financial year.
• Sections 49A & 49B regulate ITC utilisation to ensure compliance and efficiency.

Input Tax Credit (ITC) plays a crucial role in reducing tax liability under the Goods and Services Tax (GST) regime. Understanding the correct order of ITC utilisation ensures businesses optimise their tax payments and avoid unnecessary cash outflow.Read this blog to understand the ITC utilisation process, relevant GST provisions, and strategies to maximise credit usage.

ITC allows taxpayers to claim credit for the tax paid on purchases of goods and services, offsetting it against their output tax liability . The ITC can be claimed for:

• Integrated GST (IGST)
• Central GST (CGST)
• State GST (SGST) / Union Territory GST (UTGST)

ITC Claim Rules

A taxpayer can claim ITC only if:

• It is reported in the GST return.
• It is claimed before 30th November of the following financial year or before filing the annual return, whichever is earlier.
• The invoice is valid and meets all GST requirements.

Once claimed within the due period, ITC can be utilised without a time limit.

The government mandates a specific order for ITC utilisation under Rule 88A of CGST Rules, 2017. The priority order is: IGST Credit First, it is used to pay IGST liability. If any balance remains, it can be used for CGST or SGST/UTGST in any order and proportion. CGST Credit First, it is used to pay CGST liability. Any remaining balance can be utilised for IGST liability.It cannot be used to pay SGST/UTGST. SGST/UTGST Credit First, it is used to pay SGST/UTGST liability. Any remaining balance can be used for IGST liability. It cannot be used to pay CGST. Key Considerations:

• IGST credit must be completely exhausted before using CGST or SGST credit.
• Taxpayers can manually adjust ITC to optimise tax payments instead of using the default GST portal allocation.

The default ITC allocation on the GST portal follows a strict order, often leading to excess credit in CGST while requiring cash payments for SGST.Businesses can avoid this by manually adjusting IGST credit between CGST and SGST liabilities for a balanced approach.

Optimising ITC Utilisation – Practical Scenarios

Here are some examples of optimising ITC utilisation: Example 1: Default ITC Utilisation

Outcome : SGST shortfall of ₹100 paid in cash, while ₹300 of CGST remains unutilised. Example 2: Optimised ITC Utilisation

Outcome : No cash payment is required if ITC is fully optimised.

Here are some of the best practices you can follow for ITC utilisation:

• Always utilise IGST credit first .
• Manually allocate IGST credit between CGST and SGST liabilities.
• Regularly review GST filings to avoid the accumulation of underutilised credit.
• Use GST Set-off Calculators to determine the most beneficial ITC allocation.

Precautions While Utilising ITC

To ensure smooth compliance and avoid financial losses, businesses should take the following precautions when utilising ITC: Verify ITC Eligibility Make sure the input tax credit is claimed only for eligible business expenses and meets GST regulations. Maintain Proper Documentation Keep invoices, tax payment receipts, and other supporting documents ready for audits. Reconcile ITC Regularly Cross-check ITC claims with GSTR-2B to avoid discrepancies. Avoid ITC Reversals Incorrectly claimed ITC must be reversed with interest. Proper record-keeping can help avoid this. Check Vendor Compliance ITC is available only if the supplier has filed GST returns and paid the tax.

The CGST (Amendment) Act, 2018 introduced Sections 49A and 49B:

• Section 49A : ITC of CGST, SGST, or UTGST can be utilised only after fully using IGST credit.
• Section 49B : The government can prescribe the ITC utilisation method to optimise taxpayer benefits.

Proper ITC utilisation is crucial for reducing tax liabilities and avoiding cash payments. By understanding Rule 88A, Sections 49A & 49B, and optimising credit allocation, businesses can effectively manage their GST payments.Regular monitoring and strategic ITC application will ensure tax compliance and financial efficiency. For additional assistance on tax planning , connect with Aditya Birla Capital's representatives today!