Tax Laws and Practice · Input Tax Credit and Computation of GST Liability

Computation of GST Liability and Payment of Tax

Updated 11 October 2026 · Fact-checked

GST liability is the tax you pay after setting off input tax credit against output tax. Use the credit ledger in the order Section 49(5) allows, then pay the balance from the electronic cash ledger. Reverse charge tax is paid in cash, because credit pays only output tax.

Understand Computation of GST Liability and Payment of Tax

Every registered person collects GST on sales. This is output tax. The same person pays GST on purchases. If the conditions of Section 16 are met, that GST becomes input tax credit (ITC). The credit is not paid back in cash. It is used to reduce what you owe.

So the basic idea is simple: output tax minus eligible ITC gives net tax payable. The complication is that GST has four heads: IGST, CGST, SGST/UTGST and cess. Credit of each head can be used only in a fixed order. That order is the core of this topic.

The law keeps two ledgers. The electronic cash ledger holds money you deposit. Under Section 49(1), deposits by internet banking, cards, NEFT, RTGS or other prescribed modes are credited to it. The electronic credit ledger holds ITC. Under Section 49(2), ITC self-assessed in your return is credited to it.

The two ledgers are used for different things. Under Section 49(3), cash can pay tax, interest, penalty, fees or any other amount. Under Section 49(4), credit can pay only output tax, under the CGST Act or the IGST Act. Interest, penalty and late fee must be paid in cash. Tax payable on reverse charge is also paid in cash. This is the accepted position: Section 49(4) lets credit pay only output tax, and tax payable on reverse charge under Section 9(3) or 9(4) is not treated as output tax (see the definition of output tax in Section 2(82)). State this reasoning in your answer.

Section 49(12) lets the Government, on the Council's recommendation, fix a maximum share of output tax that may be paid through the credit ledger. So for some persons, part of the liability must go in cash even when credit is available.

Key rules to remember

Net GST payable (basic): Net tax = Output tax on forward charge − Eligible ITC utilised; Add reverse charge tax separately. It is payable in cash and is not reduced by ITC balance.
Total cash payment: Cash payable = Output tax − ITC utilised + Reverse charge tax + Interest + Penalty + Fee; Interest, penalty, fee and other dues are payable only from the cash ledger (Section 49(3) and (4)).
Utilisation of IGST credit - Section 49(5)(a): IGST credit: first IGST, then CGST, then SGST/UTGST; The balance after IGST liability goes to CGST and then to State/UT tax, in that order.
Utilisation of CGST credit - Section 49(5)(b): CGST credit: first CGST, then IGST; CGST credit can never pay SGST/UTGST (Section 49(5)(e)).
Utilisation of SGST/UTGST credit - Section 49(5)(c), (d): SGST (or UTGST) credit: first SGST (or UTGST), then IGST; It can pay IGST only where CGST credit balance is not available for IGST. It can never pay CGST (Section 49(5)(f)).
Order of discharge of dues - Section 49(8): (a) self-assessed tax and dues of earlier periods; (b) self-assessed tax and dues of the current period; (c) any other amount, including demand under Section 73, 74 or 74A; Within each group, the Act speaks of tax dues and other dues; interest, penalty and fee are 'other dues'.

How to solve Computation of GST Liability and Payment of Tax questions

Use this method for any liability computation question. Work head by head. Do not mix IGST, CGST and SGST in one total.

1List output tax under each head: IGST, CGST, SGST/UTGST. Take it from taxable value times rate. Exclude exempt and non-GST supplies.
2Separate out tax payable under reverse charge. Keep it in its own column because it needs cash.
3List the ITC available under each head. Remove ineligible credit (for example blocked credit or credit failing Section 16 conditions) before you start.
4Use IGST credit first against IGST liability. Then use any balance against CGST, and only after that against State/UT tax, in that order (Section 49(5)(a)). So clear the CGST liability with the leftover IGST credit first. Only IGST credit still left after that goes to SGST/UTGST.
5Use CGST credit against CGST liability, then against any IGST left. Use SGST credit against SGST liability, then against IGST left, but only if CGST credit is not available for that IGST.
6Never use CGST credit for SGST or SGST credit for CGST.
7Add up the balance of each head. This is the cash to be paid. Add reverse charge tax, interest and penalty, all payable from the cash ledger.
8State the total cash payable and any ITC carried forward in the credit ledger. Cite Section 49 in your conclusion.

Quickest way: Three-column head-wise grid

When to use it: Use it when the question has intra-State and inter-State sales and purchases with several credit balances, and time is short.

Draw three columns: IGST, CGST, SGST. Write liability on top and credit below.
First clear IGST liability with IGST credit. If liability remains, use CGST credit, then SGST credit.
Next clear CGST liability with leftover IGST credit, then own CGST credit.
Next clear SGST liability with leftover IGST credit, then own SGST credit.
Whatever is still unpaid in each column is the cash payment. Add reverse charge tax in cash.
Check that total credit used plus credit left equals total credit you started with.

Common mistakes in Computation of GST Liability and Payment of Tax

Paying reverse charge tax from the credit ledger
Students treat all tax payable as one pool that credit can reduce.
Fix: Section 49(4) lets credit pay only output tax. Tax payable on reverse charge is not output tax (Section 2(82)), so it is shown as a cash payment. This is the accepted position. After you pay it in cash, the tax may itself be claimed as ITC if the Section 16 conditions are met.
Using CGST credit to pay SGST, or the reverse
Students think CGST and SGST are the same tax at equal rates.
Fix: Section 49(5)(e) and (f) bar both. Only IGST credit can pay all three heads.
Using IGST credit in the wrong order
Students spread IGST credit across heads at will.
Fix: IGST credit must first clear IGST liability. Only then is the balance used for CGST and SGST (Section 49(5)(a)).
Paying interest or penalty from the credit ledger
Students see a large credit balance and use it for all dues.
Fix: Cash ledger can pay tax, interest, penalty, fees or any other amount. The credit ledger can pay only output tax.
Taking ineligible ITC into the computation
Students add all purchase GST without checking conditions.
Fix: Check Section 16 first: valid invoice or debit note, receipt of goods or services, tax actually paid to Government, return furnished, and credit not restricted under Section 38 communication. Also check the time limit in Section 16(4), the 30th November following the financial year or the annual return, whichever is earlier.
Ignoring the 180-day payment rule
Students focus on invoices and forget supplier payment.
Fix: If you do not pay the supplier within 180 days from the invoice date, the ITC availed must be paid back with interest under Section 50 (not for reverse charge supplies). You may take it again when you pay the supplier.

Worked examples

Example 1

In a month, Alpha Traders Pvt. Ltd., Mumbai, has output tax of CGST ₹60,000, SGST ₹60,000 and IGST ₹40,000. Its ITC balance is CGST ₹30,000, SGST ₹50,000 and IGST ₹80,000. Compute the cash to be paid. Assume all credit is eligible and there is no reverse charge.

Show the solution

Liability: IGST ₹40,000; CGST ₹60,000; SGST ₹60,000. Total ₹1,60,000.
Credit: IGST ₹80,000; CGST ₹30,000; SGST ₹50,000. Total ₹1,60,000.
Use IGST credit first for IGST liability: ₹40,000 used. IGST liability nil. IGST credit left ₹40,000.
Use the remaining IGST credit ₹40,000 against CGST first, then State tax, in that order (Section 49(5)(a)). CGST liability becomes ₹60,000 − ₹40,000 = ₹20,000. IGST credit left nil, so nothing goes against SGST.
Use CGST credit ₹30,000 against the remaining CGST ₹20,000 (Section 49(5)(b)). CGST liability nil. CGST credit left ₹10,000. This balance cannot pay SGST (Section 49(5)(e)), and IGST liability is already nil.
Use SGST credit ₹50,000 against SGST ₹60,000 (Section 49(5)(c)). SGST credit left nil. SGST liability left ₹10,000.
Check: credit used ₹40,000 + ₹40,000 + ₹20,000 + ₹50,000 = ₹1,50,000. Liability ₹1,60,000 − ₹1,50,000 = ₹10,000 cash. Credit left ₹10,000 (CGST).

Answer: Alpha Traders must pay ₹10,000 in cash, being the SGST not covered by credit. CGST credit of ₹10,000 stays in the electronic credit ledger, because CGST credit cannot pay SGST.

Example 2

Beta Services Ltd., Delhi, has output tax on forward charge of CGST ₹45,000 and SGST ₹45,000. Delhi is a Union territory with a legislature, so it levies State tax (SGST) under the Delhi GST Act. Beta also has to pay CGST ₹6,000 and SGST ₹6,000 on reverse charge. Its eligible credit balance is CGST ₹50,000 and SGST ₹40,000. Compute cash payable for the month. Ignore interest.

Show the solution

Output tax on forward charge: CGST ₹45,000; SGST ₹45,000.
Use CGST credit ₹50,000 against CGST ₹45,000 (Section 49(5)(b)). Cash needed for CGST on forward charge: nil. CGST credit left ₹5,000.
Use SGST credit ₹40,000 against SGST ₹45,000 (Section 49(5)(c)). SGST left ₹5,000. This is paid in cash, since CGST credit cannot pay State tax (Section 49(5)(e)).
Reverse charge tax: CGST ₹6,000 and SGST ₹6,000. These must be paid in cash, not from the credit ledger.
Cash payable = SGST ₹5,000 + reverse charge CGST ₹6,000 + reverse charge SGST ₹6,000 = ₹17,000.
Carry forward: CGST credit ₹5,000. After paying reverse charge tax in cash, Beta may claim it as ITC if Section 16 conditions are met, so credit will rise by ₹12,000 in the return where it is eligible.

Answer: Beta Services must pay ₹17,000 in cash (SGST ₹5,000 on forward charge, plus ₹12,000 on reverse charge). CGST credit of ₹5,000 is carried forward.

Exam tips

Draw the head-wise grid first. It earns marks even if arithmetic slips.
Quote the exact rule: Section 49(5) for order of utilisation, Section 49(4) for what credit may pay, Section 49(8) for order of discharge.
Always check Section 16 before you use any credit in the question. Read for hints like no tax invoice, goods not received, or credit claimed late.
In theory questions, define the cash ledger and the credit ledger and give the purpose of each, with the Section 49(1) and (2) sources.
End with a clear conclusion: total cash payable and credit carried forward.

Practice questions from Input Tax Credit and Computation of GST Liability

Computation of GST Liability and Payment of Tax in other exams

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

Computation of GST Liability and Payment of Tax: frequently asked questions

What is the difference between the electronic cash ledger and the electronic credit ledger?

The cash ledger holds money you deposit, and it can pay tax, interest, penalty, fees or any other amount. The credit ledger holds ITC, and it can pay only output tax. Section 49 deals with both.

Can I pay interest or late fee from ITC?

No. Section 49(4) lets the credit ledger pay only output tax. Interest, penalty and fee have to be paid from the cash ledger.

In what order must IGST credit be used?

First against IGST. The balance, if any, goes against CGST and then against State or Union territory tax, in that order (Section 49(5)(a)).

Can the balance in the ledgers be refunded?

Yes, under Section 49(6), the balance in the cash ledger or credit ledger after payment of dues may be refunded in accordance with Section 54. Section 49(10) separately lets a registered person transfer an amount in the cash ledger to the cash ledger for integrated tax, central tax, State tax, Union territory tax or cess. It also allows a transfer to the cash ledger of a distinct person for integrated or central tax under section 25(4) or (5). Such a transfer is deemed a refund from the cash ledger, and the distinct-person transfer is not allowed if the person has any unpaid liability in the electronic liability register.