Firms to Get More Flexibility on Use of Input Tax Credit

A Welcome Move to Simplify the Taxation System

The GST Council, in a bid to make the tax regime even more convenient for the taxpayers, has added flexibility to the way companies can utilize their available Input Tax Credit (ITC). Companies that have credits available against their payments of integrated GST (IGST) would now be eligible to use those credits to set off tax liabilities of SGST (State GST) and CGST (Central GST).


This was a much needed clarification, as this should help bring to rest the varied interpretations apprehended by industry experts on the utilization of IGST credit.

– Abhishek Jain, Tax Partner, EY.

Previously, due to certain limitations introduced from February this year, required firms to make use of their Input Tax Credit in a certain manner that limited their ability to manage their final tax outgoing against the tax credits available on the ledger. Amendments have been made to this rule by the GST Council of India and firms can now conveniently use their credit for payment of tax on inter-state transactions to settle their tax liability. The Council has made this move after repeated complaints from companies that felt the restrictions had led to an increase in their tax outgo.

The order of using the IGST credit was flexible earlier. A company could decide on whether to use the credits to set off state GST or central GST first. But it wasn’t clear if the company could use the same to set off both SGST and CGST simultaneously. It was interpreted that in the event of a firm deciding to set off either of SGST or CGST, it would need to exhaust the entire liability on the same GST before moving on to the second type. For instance, a company deciding to consume the IGST credits on central GST, would have to exhaust the entire CGST liability before it can set off its SGST liability using the available IGST credits. The circular issued on 23rd April clarified that the IGST credit can be utilized in a flexible manner from now on. The criteria to set off IGST liability stays as is. This means that IGST needs to be taken care of before a firm can use the remaining credit for SGCT and/or CGST in any order or proportion.

A Big Relief for Firms across the Nation

The limits introduced earlier proved to be inconvenient to the firms that claimed that their cash outgo increased during the period it was in effect, while unused (unusable) tax credits remained dormant in the books. The Central Board of Indirect Taxes and Customs (CBIC) clarified that businesses will now have full flexibility for taxes paid on inter-state transactions (IGST) in settling the liability towards GST payable to states and union territories. CBIC states that the credits from paying taxes for raw materials and services (on interstate transactions) would be available to be used to set off the GST liability to state or central governments, in any proportion and with no regard to any order. The only condition that prevails is that in instances of inter-state movement of finished goods, the first credit to be utilized has to be the IGST for settling that liability, the surplus can then be used to meet the tax liabilities of SGST and CGST.

As a result of the change in laws, companies are feeling relaxed at the prospect of making better use of Input Tax Credits. Credits from inter-state transactions can now be utilized to meet tax liability to the tax authorities of states and union territories. However, credits from CGST and SGST can’t be cross-utilized.