Taxation · Payment of Tax

Utilisation of Input Tax Credit and Order of Set-off

Updated 4 October 2026 · Fact-checked

ITC utilisation is the rule on which credit can pay which tax. IGST credit pays IGST first, then CGST and SGST. CGST and SGST credit pay their own tax first, then IGST, never each other. Cess credit pays only cess. Credit pays only output tax; interest, penalty, fees and reverse charge tax need cash.

Understand Utilisation of Input Tax Credit and Order of Set-off

Every registered person has an electronic credit ledger and an electronic cash ledger. ITC sits in the credit ledger in four separate heads: IGST, CGST, SGST/UTGST and cess. Cash sits in the cash ledger, also in separate heads. The law decides which head of credit can pay which head of liability.

Think of it as a one-way system. IGST credit is the most flexible. It can pay IGST, CGST and SGST. CGST credit can pay CGST and IGST, but not SGST. SGST/UTGST credit can pay SGST/UTGST and IGST, but not CGST. Cess credit is locked: it can pay only cess. This follows from Section 49 of the CGST Act and Rule 88A.

There is also an order of use. IGST credit must be used up first. It goes against IGST liability, and any balance goes against CGST and SGST in any order and any proportion you choose. Only after IGST credit is fully used can CGST or SGST credit be used. CGST credit then goes first against CGST, and SGST credit first against SGST. Any CGST or SGST credit left over can go against IGST.

Credit has a second limit. The credit ledger can be used only to pay output tax. Output tax here does not include tax payable under reverse charge. So tax under RCM, interest, penalty, late fee and other dues must be paid from the cash ledger.

Section 49(8) also sets the order in which dues are paid. Self-assessed tax and other dues of the return period are paid first, in this order: tax, interest, penalty, fee and others. Only then are any other amounts payable, such as demands, paid.

Key rules to remember

IGST credit: IGST credit → IGST first → then CGST and SGST/UTGST (any order, any proportion); IGST credit must be completely used before CGST or SGST credit is used (Rule 88A).
CGST credit: CGST credit → CGST first → then IGST; Never against SGST/UTGST.
SGST/UTGST credit: SGST/UTGST credit → SGST/UTGST first → then IGST; Never against CGST.
Cess credit: Cess credit → cess only; Cess credit can pay only cess, and no GST credit (IGST, CGST or SGST) can pay cess. Cess liability is paid by cess credit or cash.
What credit can pay: Credit ledger → output tax only; Not for RCM tax, interest, penalty, fees or other dues. These need cash.
Cash required: Cash payable = Total liability − Credit utilised; Compute head by head. A surplus in one head cannot cover a shortfall in a head it cannot pay.
Order of discharge of dues: Self-assessed tax and other dues of the return period first, in the order tax → interest → penalty → fee → others; then other amounts payable (such as demands); Section 49(8) sets this order. State it in a theory answer.
1% cash rule (Rule 86B): Where monthly taxable supplies (other than exempt and zero-rated supplies) exceed ₹50 lakh, the credit ledger cannot be used to pay more than 99% of output tax liability; at least 1% is paid in cash; Main exceptions: the person (or the proprietor, karta, managing director or any partner) has paid income tax of more than ₹1 lakh in each of the last two financial years; the person received refunds above ₹1 lakh in the preceding financial year on unutilised credit (zero-rated supplies or inverted duty); the person is a government department, PSU, local authority or statutory body; or the person has already paid at least 1% of output tax in cash cumulatively up to that month. Other cases exist. Check the conditions in the question.

How to solve Utilisation of Input Tax Credit and Order of Set-off questions

Work head by head and keep a small grid. This method works for any set-off problem.

1List the liability in four heads: IGST, CGST, SGST/UTGST and cess. Split off RCM tax, interest, penalty and fees. These are paid in cash only.
2List the ITC available in each head. Check that blocked or ineligible credit is already excluded.
3Use IGST credit first against IGST output tax. Note the balance.
4Use the IGST balance against CGST and SGST/UTGST liability. Choose the split that leaves no credit unused and the least cash.
5Use CGST credit against remaining CGST liability. Use SGST/UTGST credit against remaining SGST/UTGST liability. Use any leftover CGST or SGST credit against IGST liability if any is left.
6Use cess credit against cess liability only.
7Pay the rest in cash: remaining output tax, plus RCM tax, interest, penalty and fees. Show cash head by head.
8Write the closing balance of each credit head. Add a one-line note on the section or rule applied.

Quickest way: Grid and cross-out method

When to use it: Use it for MCQs and for the working in written answers when time is short.

Draw a 3-row grid for IGST, CGST and SGST credit against IGST, CGST and SGST liability.
Cross out the forbidden pairs first: CGST credit to SGST, SGST credit to CGST, and any non-cess credit (IGST, CGST or SGST) to cess. Keep cess credit only against cess.
Pay IGST liability with IGST credit. Spread the IGST balance to the CGST or SGST head that needs more, so that your own-head credits are not wasted.
In MCQs, eliminate options that use CGST credit for SGST or that use credit for interest or RCM tax. Then check the total: credit used plus cash must equal total liability.
In written answers, give a short cost statement style table, a one-line rule reference and the closing balances. This earns step marks even if the final figure slips.

Common mistakes in Utilisation of Input Tax Credit and Order of Set-off

Using CGST credit to pay SGST (or the reverse).
Students think both are 'state-level' or 'domestic' taxes and so interchangeable.
Fix: Remember that CGST and SGST credits cross only through IGST. Strike out that pair in the grid.
Using CGST or SGST credit before IGST credit is exhausted.
Students start from the head with the biggest liability or credit.
Fix: Always use IGST credit first. After it is fully used, use CGST and SGST credit on their own heads.
Paying interest, late fee or penalty from the credit ledger.
Students treat ITC as a general purse.
Fix: Credit pays output tax only. Show interest, penalty and fees as cash payments.
Setting off RCM tax with ITC.
Students think RCM is just another output tax.
Fix: RCM tax must be paid in cash. ITC of that tax can be taken afterwards, subject to conditions.
Using cess credit against GST, or GST credit against cess.
Cess appears on the same invoice, so it feels like part of GST.
Fix: Cess has its own closed loop. Keep it as a separate row.
Splitting the IGST balance badly and leaving CGST or SGST credit unused while paying cash.
Students divide the IGST balance equally without checking each head.
Fix: First use own-head credits mentally, see which head is short, then direct the IGST balance there. Check the cash figure at the end.

Worked examples

Example 1

For a month, a registered person has output tax of IGST ₹50,000, CGST ₹40,000 and SGST ₹40,000. ITC available is IGST ₹70,000, CGST ₹25,000 and SGST ₹15,000. There is no RCM, interest or cess. Compute the cash payable and the closing credit balances.

Show the solution

Total liability = ₹50,000 + ₹40,000 + ₹40,000 = ₹1,30,000. Total credit = ₹70,000 + ₹25,000 + ₹15,000 = ₹1,10,000.
IGST credit is used first against IGST: ₹50,000. IGST credit balance = ₹70,000 − ₹50,000 = ₹20,000. IGST liability is nil.
The ₹20,000 balance is used against CGST and SGST in any order. Remaining CGST liability is ₹40,000 and SGST ₹40,000. Own credits are CGST ₹25,000 and SGST ₹15,000, so CGST is short by ₹15,000 and SGST by ₹25,000, a combined shortfall of ₹40,000. The ₹20,000 IGST balance cannot cover all of it.
Split the balance as ₹15,000 against CGST and ₹5,000 against SGST. IGST credit is now nil. CGST liability = ₹40,000 − ₹15,000 = ₹25,000. SGST liability = ₹40,000 − ₹5,000 = ₹35,000.
The total cash of ₹20,000 is fixed as long as the IGST balance is used fully and the CGST share is between ₹0 and ₹15,000, so that no CGST credit is left unused. Only the head-wise cash changes. If the CGST share is x, cash is ₹(15,000 − x) under CGST and ₹(5,000 + x) under SGST. At x = ₹0 it is ₹15,000 CGST and ₹5,000 SGST. At x = ₹15,000 it is nil CGST and ₹20,000 SGST.
Now use CGST credit ₹25,000 against CGST ₹25,000. CGST liability is nil and CGST credit is nil.
Use SGST credit ₹15,000 against SGST ₹35,000. SGST balance = ₹20,000, paid in cash.
Check: credit used ₹1,10,000 + cash ₹20,000 = ₹1,30,000.

Answer: Total cash payable is ₹20,000, whatever valid split of the IGST balance you choose. On the split shown (₹15,000 to CGST, ₹5,000 to SGST) it is all under SGST: ₹20,000, with nil under CGST. The head-wise cash varies with the split. Closing credit balance is nil in IGST, CGST and SGST.

Example 2

A registered person has the following for a month. Output tax on forward charge: CGST ₹60,000 and SGST ₹60,000, with no IGST. Tax payable under reverse charge: CGST ₹8,000 and SGST ₹8,000. Interest on delayed payment of an earlier return: CGST ₹1,500 and SGST ₹1,500. Late fee: CGST ₹500 and SGST ₹500. ITC available: IGST ₹40,000, CGST ₹30,000 and SGST ₹25,000. Compute the cash payable.

Show the solution

ITC can pay only forward-charge output tax. RCM tax, interest and late fee are paid fully in cash.
IGST credit is used first. There is no IGST liability, so the whole ₹40,000 goes against CGST and SGST in any order.
Own credits are CGST ₹30,000 and SGST ₹25,000. After own credits, CGST would be short by ₹30,000 and SGST by ₹35,000. The total shortfall of ₹65,000 is more than the IGST credit of ₹40,000, so the IGST credit cannot cover it all.
Use IGST credit ₹30,000 against CGST and ₹10,000 against SGST. Then CGST liability = ₹60,000 − ₹30,000 = ₹30,000, and SGST liability = ₹60,000 − ₹10,000 = ₹50,000.
The total cash of ₹45,000 is fixed as long as the IGST credit is used fully with the CGST share between ₹5,000 and ₹30,000, so that no own-head credit is left unused. Only the head-wise cash changes. If the CGST share is x, output tax cash is ₹(30,000 − x) under CGST and ₹(x − 5,000) under SGST. The output tax cash is ₹65,000 − ₹40,000 = ₹25,000 in total.
Use CGST credit ₹30,000 against CGST ₹30,000. CGST output tax is nil.
Use SGST credit ₹25,000 against SGST ₹50,000. SGST output tax remaining = ₹25,000, paid in cash.
Cash for CGST = RCM ₹8,000 + interest ₹1,500 + late fee ₹500 = ₹10,000.
Cash for SGST = output tax ₹25,000 + RCM ₹8,000 + interest ₹1,500 + late fee ₹500 = ₹35,000.
Total cash = ₹10,000 + ₹35,000 = ₹45,000. Check: output tax cash ₹25,000 + RCM ₹16,000 + interest ₹3,000 + late fee ₹1,000 = ₹45,000.

Answer: Total cash payable is ₹45,000, whatever valid split of the IGST credit you choose. On the ₹30,000 CGST / ₹10,000 SGST split shown, it is ₹10,000 under CGST and ₹35,000 under SGST. The head-wise figures change with the split; the total does not. All ITC is used and the closing credit balance is nil.

Exam tips

Draw the credit and liability grid in every set-off problem. It shows the examiner the order and earns step marks.
Check the question for RCM tax, interest, penalty or fees. These are almost always meant to be paid in cash and are a favourite trap.
In MCQs, test each option for forbidden pairs (CGST with SGST, anything with cess) before doing any arithmetic.
When the IGST balance can go to either CGST or SGST, pick the split that leaves no credit unused and state that choice in one line.
For theory questions, write the rule in three parts: which credit pays which tax, the order of use with Rule 88A, and the limits on what credit can pay.

Practice questions from Payment of Tax

Utilisation of Input Tax Credit and Order of Set-off in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Utilisation of Input Tax Credit and Order of Set-off: frequently asked questions

Can CGST credit be used to pay SGST liability?

No. CGST credit can pay only CGST and then IGST. SGST credit can pay only SGST and then IGST. The two credits never cross directly.

What does Rule 88A say?

It sets the order of use of credit. IGST credit is used first against IGST, then the balance against CGST and SGST in any order and proportion. CGST and SGST credit are used only after IGST credit is fully used.

Can ITC be used to pay interest, penalty or late fee?

No. The credit ledger can be used only to pay output tax. Interest, penalty, late fee and other dues must be paid from the cash ledger.

Can ITC pay tax under reverse charge?

No. Tax under RCM must be paid in cash. You can claim ITC of that tax later if the conditions for credit are met.

Can cess credit be used for CGST or SGST?

No. Cess credit can be used only to pay cess. A cess liability can be paid with cess credit or cash.