GST Credit Setoff Rules

Read Time:3 Minute, 4 Second

Goods and Services Tax (GST) in India has an advantage that it has the remedy for cascading effect. It means that it allows tax payer to adjust taxes paid on purchases against the taxes that is required to be paid on sales.

If we compare to earlier tax regime, where tax paid at earlier stage was very difficult to setoff. For example, one cannot setoff service tax paid at the time of purchase against local VAT liability. This was resulting in increases cost of the product, as the taxes paid at earlier stage added to the cost of the product and also taxes were charged on taxes paid at earlier stages.

However, after introduction of GST, this ill effect was nullified, where taxes paid at earlier stage is now allowed to be setoff.

Earlier, there are number of taxes were levied, starting from manufacturing stage till it reaches to the end customer, like Excise Duty, octroi, local VAT, service tax, VAT etc., however, GST subsumed most of the taxes, and only one tax is levied. It has four components of it i.e., CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), IGST (Integrated Goods and Services Tax) and UTGST (Union Territory Goods and Services Tax).

It depends upon the Nature of supply that determines which tax component will be levied.

In this article, we will focus upon the set off rules of GST, where we will learn “How GST paid at Purchase stage will be adjusted against GST on Sales”

Although, GST gives us a benefit of adjusting input GST against Output GST, however, there are certain rules for it.

If any CGST is paid at Purchase stage, then it can be adjusted first against outward CGST liability and if any balance left, then it can be adjusted with IGST Liability.
If any SGST is paid at Purchase stage, then it can be adjusted first against outward SGST liability and if any balance left, then it can be adjusted with IGST Liability.
If any UTGST is paid at Purchase stage, then it can be adjusted first against outward UTGST liability and if any balance left, then it can be adjusted with IGST Liability.
If any IGST is paid at Purchase stage, then it can be adjusted first against outward IGST liability and if any balance left, then it can be adjusted with either with CGST or it can be adjusted against SGST or UTGST in any proportion.
CGST credit cannot against SGST liability or UTGST Liability and vice versa. Also UTGST credit cannot adjusted against CGST/SGST Liability

It is important to note that if any CGST and SGST paid in one state at purchase stage then it cannot be adjusted against outward CGST and SGST liability for another state. For example, any accommodation services availed by Mr. A in Mumbai for Rs 1,00,000 and paid CGST and SGST, both @9% in Mumbai itself i.e., CGST (Rs 9000) and SGST (Rs 9000) and Mr. A has GST registration in Delhi and it has Liability to pay for CGST- Rs 18000 and SGST- Rs 18000. Then the CGST and SGST paid in Mumbai will not be adjusted against GST liability of Delhi.

You may like to read FAQ posted on GST portal.