The GST regime has introduced interesting concepts of setting off tax liability against the Input Tax Team.

Under the GST regime, every time a transaction takes place, it has a dual effect as follows –

• Central GST (CGST)
• State GST (SGST)
• Union Territory GST (UTGST)
• Integrated GST (IGST)

In case of a transaction taking place within a state or union territory, it will attract a component of the CGST and SGST or CGST and UTGST respectively. In case of a transaction taking place on an interstate basis, the IGST shall be attracted. It is imperative that every business understands which tax it will be attracting on the basis of its location of both the head office and branch offices. This will help the business understand better how to set off ITC against tax liability as under the law.

ITC set off is done in the following manner –

• CGST → CGST and IGST
• SGST → SGST and IGST
• IGST → IGST, CGST, SGST (in that order)

Scenario 1 – Using the CGST and SGST ITC

F&M Clothing is a clothing manufacturer based out of Mumbai, Maharashtra. Let’s take for example the details of some transactions entered into between F&M and other companies in terms of both inward and outward supply of services such as –

• Inward supply (purchase by F&M) of cloth from XYZ Textiles based in Pune, Maharashtra against ITC of INR 45,000 as CGST and INR 45,000 as SGST
   
• Outward supply (sale by F&M) of garments to Lara Fashion based in Pune, Maharashtra against tax liability of INR 10,000 as CGST and INR 10,000 as SGST

The tax liability will be adjusted at the end of the month, basis the ITC in the following way –

Considering that the tax liability of F&M Clothing is INR 15,000 then:

• F&M has an ITC of INR 45,000 each against CGST and SGST (INR 90,000)
   
• It shall first utilize this ITC to set off against CGST tax lability
   
• It shall then utilize the ITC to set off against SGST tax liability (After setting off SGST input credit, is the SGST liability)
   
• Upon utilizing the ITC of both CGST and SGST we get the tax liability of F&M.
   
• ITC of CGST left after setting off tax liability towards CGST cannot be used to set off against SGST or ITC of SGST left after setting off the tax liability towards SGST cannot be used to set off against CGST. The remaining balance however can be carried over to be used in the respective categories in the next period.

Scenario 2 – Utilizing IGST ITC

Here are details of some transactions entered into by F&M Clothing on an interstate basis –

• Inward supply (purchase by F&M) of cloth from XYZ Textiles based in Bangalore, Karnatakaagainst ITC of INR 45,000 as IGST
   
• Outward supply (sale by F&M) of garments to Lara Fashion based in Chennai, Tamil Nadu against tax liability of INR 10,000 as IGST

The tax liability will be adjusted at the end of the month, basis the ITC in the following way –

Considering that the tax liability of F&M Clothing is INR 15,000 then:

• F&M has an IGST ITC of INR 45,000
• It shall first utilize this IGST ITC to set off against IGST tax lability
• The remaining IGST can be used to set off any CGST and SGST – first the remaining amount is used to set off against CGST then after that the remaining amount is used against SGST respectively

Scenario 3 – CGST cannot be used to set off against SGST liability

Let us take for example that F&M Clothing has a carry forward balance of CGST ITC of INR 15,000 – it cannot use this to set off against any tax liability of SGST nature.