Setting-off of ITC and Payment of Tax

Under the Goods and Services Tax (GST) system, a registered person is generally required to pay tax on taxable outward supplies. However, GST follows the principle of Input Tax Credit (ITC), under which eligible tax paid on inward supplies can be used to discharge output tax liability. This mechanism prevents the cascading effect of taxes and ensures that tax is effectively imposed on value addition. The process of using available ITC against output tax liability is commonly called setting off ITC. Any remaining liability after utilisation of eligible ITC must be paid through the Electronic Cash Ledger. The main provisions relating to payment and utilisation of ITC are contained in Sections 49, 49A and 49B of the CGST Act, 2017, along with the relevant rules.

1. Meaning of Setting Off ITC

Setting off ITC means utilising eligible Input Tax Credit available in the Electronic Credit Ledger against the output GST liability of the registered person.

For example:

Output GST liability = ₹1,00,000 Eligible ITC = ₹70,000

The taxpayer can use ₹70,000 ITC to discharge the eligible liability.

Balance payable in cash = ₹30,000.

Thus, ITC reduces the amount of GST that has to be paid through the Electronic Cash Ledger.

2. Electronic Credit Ledger

The Electronic Credit Ledger contains the eligible ITC available to a registered taxpayer. Under Section 49(2) of the CGST Act, 2017, the amount available in the electronic credit ledger can be used for making payment towards output tax, subject to the prescribed conditions and restrictions.

ITC may arise from eligible inward supplies of goods or services, imports and other permitted transactions.

However, ITC cannot be used for every type of GST liability. For example, credit cannot generally be used to pay interest, penalty or late fees.

3. Electronic Cash Ledger

The Electronic Cash Ledger records amounts deposited by the taxpayer with the Government through prescribed payment mechanisms.

Under Section 49(1) of the CGST Act, 2017, the taxpayer can deposit amounts into the electronic cash ledger.

Cash balance can be used for payment of:

1. Tax
2. Interest
3. Penalty
4. Late fee
5. Other amounts payable under GST law

Therefore, where ITC is insufficient or cannot be used for a particular liability, payment must be made through the Electronic Cash Ledger.

4. Order of Utilisation of ITC

The utilisation of ITC is governed by Sections 49, 49A and 49B of the CGST Act, 2017 and Rule 88A of the CGST Rules, 2017, along with the applicable utilisation provisions.

The important principle is that IGST credit should first be utilised against IGST liability.

After utilisation against IGST liability, the remaining IGST credit can be utilised against CGST and SGST or UTGST liabilities in the prescribed manner.

CGST credit can be utilised against:

• CGST and IGST

SGST or UTGST credit can be utilised against:

• SGST or UTGST and IGST

However, CGST credit cannot be utilised against SGST or UTGST liability, and SGST or UTGST credit cannot be utilised against CGST liability.

5. General Utilisation Structure

The basic utilisation structure can be understood as follows:

The utilisation must follow the order and restrictions prescribed under GST law.

6. Example of ITC Set Off

Suppose a taxpayer has the following liabilities:

IGST liability = ₹40,000
CGST liability = ₹30,000
SGST liability = ₹30,000

Available ITC:

IGST ITC = ₹50,000
CGST ITC = ₹20,000
SGST ITC = ₹20,000

First, IGST ITC of ₹40,000 is used against IGST liability.

Remaining IGST ITC = ₹10,000.

This remaining IGST ITC can then be utilised against CGST and SGST/UTGST liabilities as permitted.

The taxpayer can subsequently use eligible CGST and SGST ITC against their respective liabilities.

Any remaining liability after utilisation of eligible ITC must be paid through the Electronic Cash Ledger.

7. ITC Cannot Be Used for Every Liability

A taxpayer should understand that ITC is primarily intended for payment of output tax. It cannot generally be used for payment of interest, penalty, late fee or other amounts.

For example:

Output tax = ₹80,000
Interest = ₹5,000
Available ITC = ₹80,000

The taxpayer cannot simply use ₹80,000 ITC to clear both liabilities. The ITC can be used for the eligible output tax liability, while the interest of ₹5,000 must be paid through the Electronic Cash Ledger.

Therefore, taxpayers must distinguish between tax liability and other GST liabilities.

8. Payment Through Electronic Cash Ledger

Where eligible ITC is insufficient, the taxpayer must deposit the required amount into the Electronic Cash Ledger.

For example:

Output tax liability = ₹1,50,000
Eligible ITC = ₹1,00,000

ITC utilised = ₹1,00,000

Balance tax payable = ₹50,000

The taxpayer must deposit ₹50,000 into the Electronic Cash Ledger and use it for payment of the remaining tax liability.

Practical Problem

A registered taxpayer has the following output tax liability:

IGST = ₹60,000
CGST = ₹50,000
SGST = ₹50,000

The taxpayer has:

IGST ITC = ₹70,000
CGST ITC = ₹30,000
SGST ITC = ₹20,000

Calculate the amount payable through cash after utilisation of eligible ITC.

Solution

Step 1: Set off IGST ITC

IGST liability = ₹60,000
IGST ITC utilised = ₹60,000

Remaining IGST ITC = ₹10,000.

The remaining ₹10,000 IGST ITC can be utilised against CGST or SGST/UTGST as permitted.

Assume ₹5,000 is utilised against CGST and ₹5,000 against SGST.

Step 2: CGST Liability

CGST liability = ₹50,000

IGST ITC utilised = ₹5,000

Remaining CGST liability = ₹45,000

CGST ITC available = ₹30,000

Remaining CGST liability = ₹15,000

Step 3: SGST Liability

SGST liability = ₹50,000

IGST ITC utilised = ₹5,000

Remaining SGST liability = ₹45,000

SGST ITC available = ₹20,000

Remaining SGST liability = ₹25,000

Final Position

Therefore:

Total ITC utilised = ₹1,20,000

Total tax payable through cash = ₹40,000