GST Input Tax Credit Utilization: New & Old Rules for ITC Utilization

May 8, 20205 min read

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Under GST regime, the taxpayer paying GST on inputs can claim the credit for tax paid on inputs and utilize the same towards the liability to pay GST on output. This is input tax credit utilization of GST which enables to overcome challenges such as cascading tax prevalent under previous tax regime.Section 49 of the CGST Act, 2017 lays down the provisions in respect of the utilization of input tax credit under GST. However, changes to such provisions were introduced by the government via a circular issued on April 23, 2019.

In this article, you will learn, what is input tax credit utilization under GST and the new rules in respect of GST ITC utilization.

What is Input Tax Credit Utilization?

The process of claiming credit of GST paid on inward supply of goods and services by a registered person under GST and utilizing the same to set off GST liability on outward supply of goods and services is known as input tax credit utilization under GST.

This is unlike the previous indirect tax regime where the credit of tax charged by the Central Government was not available to set off the payment for tax charged by the state government.

Old Rule for GST ITC Utilization

As mentioned above, Section 49 of the CGST Act, 2017 contains old rules with regards to ITC utilization under GST.

Initially, the ITC could be utilized in the following manner:

CGST LiabilitySGST LiabilityIGST Liability
First, ITC on account of CGST is utilizedFirst, ITC on account of SGST is utilizedFirst, ITC on account of IGST is utilized
Then, ITC on account of IGST is utilizedThen, ITC on account of IGST is utilizedThen, ITC on account of CGST is utilized
Finally, ITC on account of SGST is utilized

It must be noted that the balance amount in the electronic cash ledger or the credit ledger after paying GST, interest fee, penalty or any other amount as per the Act is refunded to the registered person.

New Rule for GST ITC Utilization

Government on April 23, 2019 issued Circular No. 98/17/2019 – GST through which it made amendments in respect of utilization of ITC under GST.

Accordingly changes were made to section 49 of the CGST Act and Section 49 A and 49B were inserted through Central Goods and Services Tax (Amendment) Act, 2017. Such changes in the provisions came into effect from February 1, 2019.

As per Circular No. 98/17/2019-GST issued on April 23rd, 2019, the government clarified the utilization of input tax credit of integrated tax in a particular order. Section 49(A) and 49(B) were inserted in CGST Act, 2017 via an amendment. As per section 49(A), ITC of Integrated Tax has to be utilized completely before ITC of Central Tax and State Tax can be used to discharge any tax liability.

Now as per the old provision mentioned in section 49 of the CGST Act, 2017, the ITC of Integrated Tax has to be utilized first for the payment of IGST, then Central Tax and then State Tax in this order necessarily. This lead to a scenario where a taxpayer had to discharge his tax liability with regards to one kind of tax, say for instance state tax, through electronic cash ledger. However, ITC with regards to other type of tax, say central tax, remained unutilized in electronic credit ledger.

To overcome such a challenge, rule 88 (A) was inserted in CGST rules, 2017. As per this rule, ITC of Integrated Tax can be utilized to pay output tax liability towards central and state tax in any order. However, this rule was subject to a condition that the entire ITC with regards to IGST must be first completely exhausted befoe utilizing the ITC with regards to Central tax or state tax.

The following table shows the order of utilization of ITC as per this circular:

ITC Utilization Example Option I Option II Reference Material However, such a GST input tax credit can be claimed only if the registered person meets the following requirements:

  • The registered taxpayer must have the tax invoice.
  • He must have already receive goods and services.
  • The supplier has actually paid the requisite GST amount.
  • Registered taxpayer has filed the tax return.
  • The registered person (recipient) must pay the supplier the value of goods and services along with GST within 180 days from the date of issue of invoice. In case the registered person (recipient) fails to do so, the amount od credit claimed would be added to the output tax liability of such a person together with interest. However, if the registered person (recipient) has made the payment, he is authorized to claim the credit for the same. In cases, where part payment is made by the registered person (recipient), credit can be claimed on a proportionate basis.
Input tax Credit on account ofOutput liability on account of Integrated taxOutput liability on account of Central taxOutput liability on account of State tax / Union Territory tax
Integrated tax(I)(II) – In any order and in any proportion
(III) Input tax Credit 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)
Tax HeadOutput Tax LiabilityITC
IGSTRs 1,000Rs 2,000
CGSTRs 1,000Rs 600
SGST/UTGSTRs 1,000Rs 600
TotalRs 3,000Rs 3,200
ITC On Account OfDischarge of Output Tax Liability on Account of IGSTDischarge of Output Tax Liability on Account of CGSTDischarge of Output Tax Liability on Account of SGST/UTGSTBalance of ITC
Integrated Tax1,000Rs 500Rs 500Nil
Input tax Credit on account of Integrated tax has been completely exhausted
Central Tax0Rs 500Rs 100Nil
State/UT Tax00Rs 400Rs 200
TotalRs 1,000Rs 1,000Rs 1,000Rs 200
ITC On Account OfDischarge of Output Tax Liability on Account of IGSTDischarge of Output Tax Liability on Account of CGSTDischarge of Output Tax Liability on Account of SGST/UTGSTBalance of ITC
Integrated TaxRs 1,000Rs 600Rs 4000
Input tax Credit on account of Integrated tax has been completely exhausted
Central TaxRs 0Rs 400Rs 2000
State/UT TaxRs 0Rs 0Rs 400Rs 200
TotalRs 1,000Rs 1,000Rs 1,000Rs 200