Calculating tax liability and its payment including the order of utilisation of input tax credit

Tax liability refers to the legal obligation of a registered person to pay tax to the government on account of taxable supplies made, reverse charge liabilities, and other obligations as per GST law. Under GST, tax liability primarily arises from the supply of goods or services within India and on imports. It is determined after considering the tax payable on outward supplies (sales) and adjusting the available Input Tax Credit (ITC) on inward supplies (purchases).

The liability comprises three main components – CGST, SGST/UTGST, and IGST depending on the nature of the supply (intra-state or inter-state). Taxpayers must calculate their output tax liability in every return period, utilise eligible ITC in the correct order to offset the liability, and pay any remaining balance through the electronic cash ledger.

In addition to tax on supplies, liability may also include tax payable under reverse charge, interest for late payment, late fees, or penalties. The concept ensures that the correct amount of tax is collected and deposited to the government. Compliance with tax liability is a fundamental duty of every GST-registered person to maintain transparency and smooth flow of tax credits.

In GST, every registered person has to:

• Compute output tax liability (GST on outward supplies)

• Adjust eligible ITC (tax paid on inputs, input services and capital goods)

• Pay the net tax liability (if any) in cash through the electronic cash ledger.

The manner of utilisation of ITC is laid down in Section 49 of the CGST Act, 2017 and related rules.

Calculating Tax Liability:

The tax liability of a registered person is calculated as follows:

Output Tax Liability =
GST on taxable outward supplies (sales)

• Tax on reverse charge liability

• Tax on any other liability (interest, penalty if applicable)

Net GST Payable = Output Tax Liability – Input Tax Credit (ITC available)

Components of GST Liability:

1. Output GST

• • CGST (Central GST)

  • SGST/UTGST (State/UT GST)

  • IGST (Integrated GST)

2. Less ITC

• • ITC of CGST, SGST/UTGST, and IGST on eligible inward supplies.

Balance: Paid using the electronic cash ledger.

ITC Utilisation – The Logic

GST law prescribes a specific order for utilising ITC, because ITC of one type of tax cannot be used freely for another type.

• IGST credit has the highest flexibility – it can be used against IGST, CGST, or SGST.

• CGST credit can be used only for CGST and then IGST, not for SGST.

• SGST credit can be used only for SGST and then IGST, not for CGST.

This prevents cross-utilisation of CGST and SGST.

Order of Utilisation of Input Tax Credit (as per Section 49)

Step 1: Use IGST Credit

• First, IGST credit is used to pay IGST.

• Any remaining IGST credit can be used to pay:

  • CGST, and then

  • SGST/UTGST (in that order).

Step 2: Use CGST Credit

After IGST credit is exhausted:

• • Use CGST credit to pay CGST.

  • If CGST credit still remains, use it for IGST.

  • CGST credit cannot be used for SGST/UTGST.

Step 3: Use SGST/UTGST Credit

After IGST credit is exhausted:

• • Use SGST/UTGST credit to pay SGST/UTGST.

  • If SGST/UTGST credit still remains, use it for IGST.

  • SGST/UTGST credit cannot be used for CGST.

Important:

• Cross-utilisation between CGST and SGST/UTGST is strictly not allowed.

• Payment sequence is strictly followed by the GST portal during return filing.

Practical Example

Scenario:

• Output tax liability:

  • IGST = ₹80,000

  • CGST = ₹40,000

  • SGST = ₹40,000

ITC available:

• • IGST = ₹70,000

  • CGST = ₹30,000

  • SGST = ₹25,000

Step 1: Set-off IGST liability (₹80,000)

• Use IGST ITC ₹70,000 first.

• Remaining IGST liability = ₹10,000.

Step 2: Pay remaining IGST (₹10,000)

• Use CGST credit: ₹10,000.

• IGST liability now becomes zero.

• Remaining CGST ITC = ₹20,000.

Step 3: Set-off CGST liability (₹40,000)

• Use remaining CGST ITC ₹20,000.

• Remaining CGST liability = ₹20,000 (to be paid in cash).

Step 4: Set-off SGST liability (₹40,000)

• Use SGST ITC ₹25,000.

• Remaining SGST liability = ₹15,000 (to be paid in cash).

Net Tax Payable in Cash:
CGST = ₹20,000, SGST = ₹15,000.
All other liabilities are covered by ITC.

Payment of Tax

The payment can be made through:

• Electronic Credit Ledger: For utilisation of ITC.

• Electronic Cash Ledger: For payment of net balance tax liability, interest, late fee, penalty.

The payment is made by debiting the respective ledger while filing Form GSTR-3B.

Important Provisions

• No direct refund: ITC cannot be transferred between types of tax except as per the utilisation rules.

• Late payment: Any unpaid tax attracts interest at 18% per annum from the due date.

• Self-assessment: Liability and ITC utilisation are self-assessed in the return.

Steps to Calculate and Pay GST

• Calculate total output GST on sales.

• Calculate eligible ITC.

• Deduct ITC from output liability in the order prescribed.

• Pay remaining liability using cash ledger.

• Submit return (GSTR-3B).