New GST Set-Off Rules – Order of Utilisation

What are the new rules for GST set-off? Business owners deal with many regulations while trying to comply with Goods and Services Tax. On March 29, 2019, the government amended set-off procedures. According to this new regulation, utilization of credits brought forward from IGST should be made fully before resorting to CGST or SGST credit. Therefore, we intend to make these rules simple and understandable.

Order of Utilization of GST Input Tax Credit

Output of 1st Set off from 2nd set off from
IGST IGST CGST and SGST
CGST IGST Balance CGST
SGST IGST Balance SGST

In other words, you can simply understand the concept of GST set-off rule easily by the following points.

1. IGST Input Credit Utilization 

The IGST Input Tax Credit Shall be

  1. first utilized towards the output of IGST;
  2. then towards the output CGST;
  3. and then towards the output SGST

2. CGST Input Tax Credit Utilization 

The CGST Input tax credit shall be

  1. first utilized toward the output of CGST
  2. and then toward the output of IGST
  3. You can’t adjust CGST input toward the output of SGST

3. SGST Input Credit Utilization

The SGST Input tax credit shall be

  • first utilized the output of SGST
  • and then toward the output of IGST
  • You can’t adjust SGST Input toward the output of CGST

How do the new GST set-off rules work?

A business can set off its ITC against its output liability under the new GST set-off rules, as described above. Below are some examples that will clarify the confusion of businessmen about the new GST set-off rules.

Example:

Head Output Input
IGST 1000 1300
CGST 300 200
SGST/UTGST 300 200
Total 1600 1700

Option 1

Here CGST is adjusted first from IGST input balance.

gst set off rules option 1 cgst adjust first

Option 2

In this case, you can adjust the IGST Input balance where the liability lies by using the smart adjustment. For cash payment avoidance, we take more IGST input against SGST output.

gst set off rules option 1 smart adjustment to avoid payable

Impact on Businesses of New Set-off Rules

  1. Under option 1, GST is liable for payment under the head of SGST. In option 2, however, there is no liability because it adjusts the balance of the IGST input tax credit to SGST output.
  2. If we adjust the new set off rules smartly as per rules, then we have more working capital without any blockages.
  3. Businesses can reduce their GST liability by utilizing the set-off provisions effectively, resulting in lower tax payments. Reduced GST payments can improve the overall cost structure of a business and increase profitability.
    Businesses will pay less tax to the government due to a reduced GST liability. By freeing up funds for other business needs, like investment, expansion, or working capital, can enhance cash flow.

Don’t forget to use our free GST Set off Rules Calculator after reading through completely.

Old Set-Off Rules (till January 2019):

Payment for IGST: 1st set-off from IGST, then CGST and SGST.
Payment for CGST: 1st set-off from CGST, then IGST.
Payment for SGST: 1st set-off from SGST, then IGST.

New Set-Off Rules (from 1st February 2019):

Payment for IGST: 1st set-off from IGST, then CGST and SGST.
Payment for CGST: 1st set-off from IGST, then CGST.
Payment for SGST: 1st set-off from IGST, then SGST.

To Better Understand:

Old Set Off Rules till January 2019 New Set Off Rules from 1st February 2019
Payment for 1st set off from 2nd set off from Payment for 1st set off from 2nd set off from
IGST IGST CGST and SGST IGST IGST CGST and SGST
CGST CGST IGST CGST IGST CGST
SGST SGST IGST SGST IGST SGST

New Utilization Rules Statutory Provisions

Here are some of the important provisions related to GST Set Off/utilization.

Rule 88A Order of Utilization of Input Tax Credit
Section 49A CGST ACT 2017 Utilization of Input Tax Credit Subject to Certain Conditions
Section 49B of CGST ACT 2017 Utilization of Input Tax Credit Subject to Certain Conditions
Notification No.16/2019 Dt 29-03-2019
Circular No.98/17/2019 GST Dt 23-04-2019

Section 49A and 49B incorporated by the GST amendment act, 2018 effective from 1st Feb 2019. The impact of these notifications has been practically nullified by the issuance of rule 88A vide notification no. 16/2019 Ct dated 29th March 2019. CBIC vide circular No. 98/17/2019-GST dated 23-04-2019 clarified the manner of utilizing the credit.

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