GST Input Tax Credit (ITC) Set-off Rules – Simplified with examples

In this Changing Taxation regime of Goods and Service Tax (GST), one needs to understand the current GST ITC or Input Tax Credit Setoff Rules applicable under Normal Charge Mechanism or Reverse Charge Mechanism(RCM).

Every person has two legs for doing their work, similarly every business or profession has two legs.

Inward leg– It refers to goods or services received by the person for the furtherance of business. In simple terms, buying or receipt of goods or services.

Outward leg– It refers to all the Supply of goods or service or both made to customers. In simple terms, selling or providing goods or services.

Read Also : GST on Insurance Premium

The entity pays GST on inward leg and collects GST on outward leg. Taking Credit of GST paid is known as Input Tax Credit (ITC). Adjusting of GST paid on Inward leg with GST payable on outward leg is known as Input Tax Credit Set-off. Let us consider an example of a business of Textile Retailer, Mr BabaTax.

Inward leg – He buys product from the wholesaler and pays GST to supplier.

Outward leg– He sells the goods to the customers and collects GST from customers.

Retailer, BabaTax pays Rs.100 as GST on purchase of goods from wholesaler. On selling these goods, he collects Rs.150 from customer. Now, BabaTax can adjust Rs 100 (i.e. paid to wholesaler) with Rs 150 (collects from Customer) and pay the difference amount i.e. Rs.50 to Government.

GST has 3 components

1. CGST– Centre Goods and Service Tax
2. SGST/UTGST– State Goods and Service Tax or Union territory Goods and Service Tax
3. IGST– Integrated Goods and Service Tax

When supply is made within the state, it is known as Intrastate. For Intrastate supply CGST and SGST/UTGST are charged. When supply is made outside the state, it is known as Interstate. For Interstate Supply IGST is charged. Read More- Place of Supply of Goods in GST

A taxable person is entitled to take ITC of IGST, CGST, SGST/UTGST and Cess. This ITC can be used for payment of output tax liability.However, there are some rules for Setoff of GST ITC. The rules are as follows-  

1. IGST Input Tax Credit should be first used for payment of IGST Output Tax liability. Then Remaining IGST ITC can be used for either CGST or SGST/UTGST in any order or any proportionate amount (like 50:50, 30:70, 60:40 etc).

For example, ITC of IGST is available Rs 1,000. IGST liability is Rs 100, CGST liability is Rs 600 and SGST liability is Rs 400. ITC set-off will be as follows-

Payment from Rs 1000 ITC of IGST	Option 1	Option 2
IGST Liability	100	100
CGST Liability	600	500
SGST Liability	300	400
Payable in Cash	100 (SGST)	100 (CGST)

The entire IGST ITC should be used fully before using ITC of CGST or SGST/UTGST.

2. ITC of CGST should be first used for payment of CGST output Tax Liability then balance for IGST Liability. CGST Input Tax Credit cannot be used for payment of SGST Liability.  

For example, CGST ITC is available Rs 1,000. IGST liability is Rs 400 and CGST liability is Rs 700 and SGST liability is Rs 400. ITC set-off will be as follows-

Particular	Amount
CGST ITC	1,000
Less: CGST Liability	(700)
Less: IGST Liability	(300)
Payable in Cash	100(IGST) 400 (SGST)

Read Also: GST ITC Refund- Cases, Process, Documents

3. ITC of SGST/UTGST should be first used for payment of SGST/UTGST output Tax Liability then balance for IGST Liability. SGST/UTGST Input Tax Credit cannot be used for payment of CGST Liability.

For example, SGST ITC is available Rs 1,000. IGST liability is Rs 400 and SGST liability is Rs 700 and SGST liability is Rs 400. ITC set-off will be as follows-

Particular	Amount
SGST ITC	1,000
Less: SGST Liability	(700)
Less: IGST Liability	(300)
Payable in Cash	100(IGST) 400 (CGST)

4. ITC of SGST can be used for payment of IGST liability only when ITC of CGST has been used fully.

5. Cess Input Tax Credit can be used for Payment of Cess Tax liability only.

The above discussion can be summarized as –

Credit Of	1st Setoff Against	Set-off of Balance credit
IGST	IGST	CGST or SGST/UTGST in best possible manner
CGST	CGST	IGST
SGST/ UTGST	SGST/ UTGST	IGST

Basic Condition for claiming GST ITC   

There are some condition that are required to be fulfilled by the entity to claim Input Tax Credit-

1. A person must be registered in GST.
2. He is having tax invoice or debit note in his possession.
3. The supply of goods or service or both must be completed. If supply is in installment, Credit is claimed after last installment of supply is received.
4. Tax must be paid to Government by the supplier.
5. No ITC is available, if person claimed GST in depreciation.
6. No ITC is available, if person registered under composition scheme.

Read More: 14 Blocked Input Tax Credit (ITC) under GST

Lets understand the ITC set-off with examples

Illustration 1- Mr. Shiv paid GST on inward supply after adjusting carry forwards

IGST	400
CGST	300
SGST	500
Cess	100

And he collects GST on outward supply.

IGST	500
CGST	700
SGST	700
Cess	500

Calculation of GST ITC Set-off

Particular	IGST	CGST	SGST	Cess
Output liability	500	700	700	500
Less: Input IGST
1st preference (IGST)	400	0	0	0
2nd preference	0	0	0	0
Less: Input CGST
1st preference (CGST)	0	300	0	0
2nd preference (IGST)	0	0	0	0
Less: Input SGST
1st preference (SGST)	0	0	500	0
2nd preference (IGST)	0	0	0	0
Less: Cess	0	0	0	100
Payable in Cash	100	400	200	400

GST ITC Carry Forward to next Period

Particular	IGST	CGST	SGST
Input Tax	400	300	500
Less: Utilized	400	300	500
Carry Forward	0	0	0

Read Also: GST on Purchase and Sale of second hand used goods

Illustration 2- Mr. Shiv paid GST on inward supply

IGST	CGST	SGST
300	800	800

And he collects GST on outward supply

IGST	CGST	SGST
500	700	700

Calculation of GST ITC Set-off

Particular	IGST	CGST	SGST
Output liability	500	700	700
Less: Input IGST
1st preference (IGST)	300	0	0
2nd preference (best possible)	0	0	0
Less: Input CGST
1st preference (CGST)	0	700	0
2nd preference (IGST)	100	0	0
Less: Input SGST
1st preference (SGST)	0	0	700
2nd preference (IGST)	100	0	0
Payable in Cash	0	0	0

GST ITC Carry Forward to next Period

Particular	IGST	CGST	SGST
Input Tax	300	800	800
Less: Utilized	300	800	800
Carry Forward	0	0	0

Read Also: TCS in Goods and Service Tax (GST) – Registration, Refund, Rate

Illustration 3- Mr. Shiv paid GST on inward leg after adjusting carry forwards

IGST	CGST	SGST
900	300	500

And he collects GST on outward leg–

IGST	CGST	SGST
500	700	700

Calculation of GST ITC Set-off

Particular	IGST	CGST	SGST
Output liability	500	700	700
Less: Input IGST
1st preference (IGST)	500	0	0
2nd preference (best possible)	0	400	0
Less: Input CGST
1st preference (CGST)	0	300	0
2nd preference (IGST)	0	0	0
Less: Input SGST
1st preference (SGST)	0	0	500
2nd preference (IGST)	0	0	0
Payable in Cash	0	0	200

GST ITC Carry Forward to next Period

Particular	IGST	CGST	SGST
Input Tax	900	300	500
Less: Utilized	900	300	500
Carry Forward	0	0	0

NOTE- In this case multiple answer are possible as 400 of input of IGST can be used for SGST output liability as well.

Read Also: How to do verification of GST Number and return filing status of GSTIN?

Treatment of GST paid on RCM basis

In Reverse Charge Mechanism (RCM) under GST, the customer (Recipient of goods/services) pays GST to the Government. Some of the Supply of goods or service or both attracts GST under Reverse Charge Mechanism (RCM) basis that means recipient of supply will deposit the GST to government. Payment for GST under RCM cannot be made from Input Tax Credit available. Payment for RCM is required to be done in Cash. Read Also: Updated List of Reverse Charge Mechanism (RCM) with Examples

For Example, Mr. Rajan received service of lawyer for his business, Rajan will pay GST on RCM basis. He can claim GST paid under RCM as Input Tax Credit.

Read Also: What is GST PMT 09 and how to file form PMT 09?

Illustration 4- Mr. Shiv paid GST on inward supply

IGST	CGST	SGST
500	700	500

He also pays GST under RCM of Rs 20 (Rs 10 CGST + Rs 10 SGST) in cash which is available as ITC on the spot. He collects GST on outward supply.

IGST	CGST	SGST
400	300	300

Calculation of GST ITC Set-off

Particular	IGST	CGST	SGST
Output liability	400	300	300
Less: Input IGST
1st preference (IGST)	400	0	0
2nd preference (best possible)	0	100	0
Less: Input CGST
1st preference (CGST)	0	200	0
2nd preference (IGST)	0	0	0
Less: Input SGST
1st preference (SGST)	0	0	300
2nd preference (IGST)	0	0	0
Payable in Cash	0	0	0

GST ITC Carry Forward to next Period

Particular	IGST	CGST	SGST
Input Tax	500	700	500
RCM Credit	0	10	10
Less: Utilized	(500)	(200)	(300)
Carry Forward	0	510	210

NOTE– in this case multiple answer are possible as Rs 100 of input of IGST can be used for SGST output liability as well.

If you still have confusion, you can use our GST Input Tax Credit Calculator

For any questions, you may reach us at Discussion Forum

The author of above article is Aditya Kishore.

Disclaimer:The article or blog or post (by whatever name) in this website is based on the writer’s personal views and interpretation of Act. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon. 
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