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

Utilisation of Input Tax Credit and Order of Set-off

Updated 11 October 2026 · Fact-checked

Input tax credit sits in the electronic credit ledger and can pay only output tax. IGST credit is used first, against IGST, then CGST, then SGST/UTGST. CGST and SGST credit is used only after IGST credit is exhausted. CGST and SGST credit never pay each other's tax.

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

Input tax credit (ITC) is the tax you paid on purchases, which you set off against the tax you owe on sales. Credit is recorded by type: IGST, CGST and SGST/UTGST. Each balance sits in your electronic credit ledger. Section 49(2) credits the ITC self-assessed in your return to this ledger.

The credit ledger has a limited use. Under Section 49(4), it can be used only to pay output tax under the CGST Act or the IGST Act. Interest, penalty, fee and late fee must be paid from the electronic cash ledger, which holds your deposits (Section 49(1) and (3)).

Section 49(5) sets out which credit can pay which tax. IGST credit goes first against IGST, and any balance then goes against CGST and SGST/UTGST, in that order. CGST credit goes first against CGST, and the balance can pay IGST. SGST credit goes first against SGST, and the balance can pay IGST. UTGST credit works like SGST credit. CGST credit can never pay SGST/UTGST, and SGST/UTGST credit can never pay CGST.

Section 49A adds a priority rule that applies despite Section 49. CGST, SGST or UTGST credit may be used for any payment only after the IGST credit has first been fully used for that payment. So you cannot hold back IGST credit and use CGST credit first.

The provisos to Section 49(5) add one more point. SGST/UTGST credit can pay IGST only where the CGST credit balance is not available for that purpose. Section 49B lets the Government prescribe the order and manner of utilisation on the Council's recommendation, subject to the bar in Section 49(5)(e) and (f).

Key rules to remember

IGST credit
IGST credit → IGST first → then CGST → then SGST/UTGST
Section 49(5)(a). The balance goes to CGST and then SGST/UTGST, in that order.
CGST credit
CGST credit → CGST first → then IGST
Section 49(5)(b). It can never be used against SGST/UTGST, as Section 49(5)(e) bars this.
SGST/UTGST credit
SGST/UTGST credit → SGST/UTGST first → then IGST
Section 49(5)(c) and (d). It can pay IGST only where the CGST credit balance is not available for IGST.
Priority of IGST credit
CGST/SGST/UTGST credit used only after IGST credit is fully used
Section 49A. It overrides Section 49.
Use of the ledgers
Credit ledger → output tax only; cash ledger → tax, interest, penalty, fee and other dues
Section 49(3) and (4). Interest, penalty, fee and other dues can be paid only from the electronic cash ledger, because Section 49(4) limits the credit ledger to output tax.
Order of discharge of dues
(a) previous periods → (b) current period → (c) other amounts, including demands under Sections 73, 74 and 74A
Section 49(8).

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

Use this method for any set-off question. Work tax head by tax head, and keep the order fixed.

  1. 1List the opening credit balances in IGST, CGST and SGST/UTGST, and the output liability in each head.
  2. 2Decide whether the supplies are intra-State or inter-State. This tells you which liabilities exist.
  3. 3Pay the IGST liability first with IGST credit. Then pay the CGST and SGST liabilities with any IGST credit left. Use it against CGST first, then SGST/UTGST, in that order.
  4. 4Pay the remaining IGST liability with CGST credit, then with SGST/UTGST credit, as Section 49(5) and its provisos allow. Remember Section 49A: IGST credit must be used up before CGST or SGST credit is used for any payment.
  5. 5Pay the remaining CGST liability with CGST credit, and the remaining SGST liability with SGST credit. Never cross CGST and SGST.
  6. 6Any shortfall in a head is paid in cash from the electronic cash ledger. Interest, penalty, fee and other dues can be paid only from the cash ledger, because Section 49(4) limits the credit ledger to output tax.
  7. 7Show the closing credit balance of each head and the cash payable. State the section relied on.

Quickest way: Three-column set-off table

When to use it: Use it for numerical questions with several balances and liabilities.

  1. Draw columns for IGST, CGST and SGST. Write the credit and the liability for each.
  2. Set IGST credit against IGST liability first. Then use what is left against CGST and then SGST.
  3. Set CGST credit against remaining CGST liability. Set SGST credit against remaining SGST liability.
  4. If an IGST liability remains, use CGST credit first, then SGST credit. The Section 49(5) provisos allow SGST credit against IGST only where the CGST credit balance is not available for it.
  5. Whatever liability is left is paid in cash. Check that no CGST credit was used against SGST.

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

  • Using CGST credit to pay SGST liability, or the reverse.

    Students think both are parts of GST and so interchangeable.

    Fix: Remember Section 49(5)(e) and (f). CGST and SGST/UTGST credit can never pay each other's tax. Only IGST credit can pay all three.

  • Using CGST credit before the IGST credit is exhausted.

    Students match like with like and forget the priority rule.

    Fix: Apply Section 49A. IGST credit must be used fully first, even against CGST or SGST liability.

  • Using IGST credit against SGST before CGST.

    Students pick the head they want to clear first.

    Fix: Section 49(5)(a) fixes the order for IGST credit: IGST, then CGST, then SGST/UTGST.

  • Paying interest or late fee from the credit ledger.

    Students treat all balances as one pool.

    Fix: Section 49(4) lets credit pay only output tax. Pay interest, penalty and fee in cash.

  • Using SGST credit against IGST while CGST credit is available for IGST.

    Students ignore the proviso to Section 49(5)(c).

    Fix: SGST credit can pay IGST only where the CGST credit balance is not available for it. Use CGST credit first.

Worked examples

Example 1

A registered person has ITC of IGST ₹50,000, CGST ₹30,000 and SGST ₹20,000. Its output liability is IGST ₹10,000, CGST ₹40,000 and SGST ₹25,000. Show the set-off and the cash payable.

Show the solution
  1. IGST liability ₹10,000 is paid from IGST credit of ₹50,000. IGST credit left: ₹40,000.
  2. CGST liability is ₹40,000. Use the remaining IGST credit first (Sections 49(5)(a) and 49A): ₹40,000 is set off. IGST credit left: nil. CGST liability left: nil.
  3. CGST credit of ₹30,000 stays unused. Nothing remains in CGST liability for it.
  4. SGST liability is ₹25,000. IGST credit is already exhausted. Use SGST credit of ₹20,000. SGST liability left: ₹5,000.
  5. CGST credit cannot pay SGST (Section 49(5)(e)). So ₹5,000 of SGST is paid in cash.
  6. Closing credit: IGST nil, CGST ₹30,000, SGST nil.

Answer: Cash payable is ₹5,000 (SGST). Closing credit balance: CGST ₹30,000, with IGST and SGST nil.

Example 2

A registered person has ITC of IGST ₹15,000, CGST ₹25,000 and SGST ₹10,000. The output liability is IGST ₹60,000, CGST ₹5,000 and SGST ₹5,000. Show the set-off.

Show the solution
  1. IGST credit is used first, as Section 49A requires. IGST liability ₹60,000 less IGST credit ₹15,000 leaves IGST liability ₹45,000. IGST credit left: nil.
  2. IGST credit is now exhausted, so CGST and SGST credit can be used. Under Section 49(5)(b), CGST credit is first used against CGST liability, and only the balance may pay IGST. CGST liability ₹5,000 is set off. CGST liability left: nil. CGST credit left: ₹20,000. (Separately, Section 49B is the enabling power under which the Government may prescribe the order and manner of utilisation, subject to Section 49(5)(e) and (f).)
  3. The balance CGST credit of ₹20,000 now pays IGST (Section 49(5)(b)). IGST liability left: ₹45,000 - ₹20,000 = ₹25,000. CGST credit left: nil.
  4. SGST credit goes first against SGST liability (Section 49(5)(c)). SGST liability ₹5,000 is set off. SGST liability left: nil. SGST credit left: ₹5,000.
  5. The balance SGST credit of ₹5,000 can pay IGST, because the CGST credit balance is no longer available for IGST (proviso to Section 49(5)(c)). IGST liability left: ₹25,000 - ₹5,000 = ₹20,000. SGST credit left: nil.
  6. The remaining IGST liability of ₹20,000 is paid in cash. CGST and SGST liabilities are fully cleared by credit.

Answer: Cash payable is ₹20,000, all of it IGST. CGST and SGST liabilities are cleared by credit, and all credit balances are nil. CGST and SGST credit were used for payment only after the IGST credit was exhausted, as Section 49A requires.

Exam tips

  • Write the section number with each step. Examiners reward Section 49(5) and Section 49A when cited.
  • Always give the full order for IGST credit: IGST, CGST, then SGST/UTGST.
  • State clearly that CGST and SGST/UTGST credit can never pay each other's tax.
  • In numerical questions, show a small table and the cash payable. Mention that interest and penalty need cash.
  • Show a closing balance for each credit head. Missing it loses easy marks.

Practice questions from Input Tax Credit and Computation of GST Liability

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

What does Section 49A of the CGST Act say?

It says that, despite Section 49, CGST, SGST or UTGST credit can be used to pay a tax only after the IGST credit has first been fully used for that payment. It makes IGST credit the first to be used.

Can IGST credit be used to pay CGST and SGST?

Yes. Under Section 49(5)(a), IGST credit pays IGST first. The balance then pays CGST and then State or Union territory tax, in that order.

Can CGST credit be used to pay SGST?

No. Section 49(5)(e) bars the use of CGST credit to pay State or Union territory tax. Section 49(5)(f) bars the reverse.

Can the electronic credit ledger pay interest or penalty?

No. Under Section 49(4), the credit ledger can pay only output tax. Interest, penalty, fee and other dues are paid from the electronic cash ledger.