ITC Set-Off Order IGST CGST SGST GST 2026 | EaseValue

What Happened?

In October 2026, the GST Council issued important clarification on the order and hierarchy of Input Tax Credit (ITC) utilisation across Integrated GST (IGST), Central GST (CGST), and State GST (SGST). This update mandates a specific sequence that all GST-registered businesses must follow when setting off their tax liabilities. The clarification comes as several taxpayers were making errors in their ITC utilisation, leading to unnecessary penalties and interest under the GST regime.

Background & Legal Context

ITC Under GST Law: Input Tax Credit is governed under Section 16 of the CGST Act, 2017 (read with corresponding SGST Act provisions and IGST Act, 2017). The fundamental principle is that eligible tax paid on inputs, input services, and capital goods can be adjusted against output tax liability, thereby preventing cascading of taxes.

The Three Components of GST:

• IGST (Integrated GST): Applied on inter-state supplies, collected at the central level
• CGST (Central GST): Applied on intra-state supplies, collected by the central government
• SGST (State GST): Applied on intra-state supplies, collected by the state government

The Challenge: Before this October 2026 clarification, the GST law (Section 16) did not explicitly specify the order in which a taxpayer must set off IGST, CGST, and SGST credits. This ambiguity led to:

• Taxpayers claiming SGST before CGST (or vice versa)
• Blocking of IGST credits when not required
• Unintended ITC reversals and demand notices from tax officers
• Litigation between taxpayers and the Revenue

The New Rule (AY 2026-27 onwards): The GST Council has mandated this order of set-off:

1. First: Set off IGST against IGST output tax liability
2. Second: Remaining IGST can be set off against CGST and SGST combined output tax
3. Third: CGST credit can be set off only against CGST output liability
4. Fourth: SGST credit can be set off only against SGST output liability

This hierarchy is now reflected in the updated GST Rules and is binding on all taxpayers from AY 2026-27.

What Does This Mean for You?

For Exporters and Inter-State Traders: If your business involves inter-state supplies or exports, you will generate significant IGST credits. Under the new rule, you must first exhaust IGST against IGST output liability. Only the unused IGST can be carried forward or claimed as refund. This provides clarity but may delay your refund claims if not properly managed.

For Intra-State Businesses: If you operate only within one state (intra-state supplies), you generate CGST and SGST in equal amounts. The new rule strictly separates these—CGST credit cannot be set off against SGST liability and vice versa. This is important because:

• If your CGST liability is ₹50,000 but CGST credit is ₹80,000, the excess ₹30,000 cannot be used against SGST
• Similarly, if SGST credit exceeds SGST liability, that excess cannot be used for CGST
• You will need to carry forward or apply for refund of such excess credits

For Mixed Businesses (Inter-state + Intra-state): If you make both inter-state (IGST) and intra-state (CGST+SGST) supplies, the hierarchy is critical. You must allocate your input credits carefully to maximize their utilisation without blocking credits unnecessarily.

Practical Example:

Say ABC Manufacturing Ltd. (registered in Rajasthan) has:

• IGST Input Credit: ₹2,00,000 (from inter-state purchases)
• CGST Input Credit: ₹1,50,000 (from intra-state purchases)
• SGST Input Credit: ₹1,50,000 (from intra-state purchases)
• IGST Output Liability: ₹80,000
• CGST Output Liability: ₹1,20,000
• SGST Output Liability: ₹1,20,000

Under the New Order:

1. Set ₹80,000 IGST credit against ₹80,000 IGST liability (Full set-off) → Remaining IGST: ₹1,20,000
2. Set ₹1,20,000 remaining IGST against CGST and SGST combined (₹2,40,000) → This covers ₹1,20,000, leaving ₹1,20,000 liability to be met by CGST/SGST credits
3. Set ₹1,50,000 CGST credit against ₹1,20,000 CGST liability → Excess CGST: ₹30,000 (cannot be adjusted against SGST)
4. Set ₹1,50,000 SGST credit against ₹1,20,000 SGST liability → Excess SGST: ₹30,000 (cannot be adjusted against CGST)
5. Total excess credits to be carried forward or refunded: ₹30,000 + ₹30,000 = ₹60,000

Impact: Proper planning of credit utilisation is now essential to avoid blocking credits and delaying refunds.

What Should You Do Now?

1. Audit Your Current Practice: Review your last 2-3 GST returns (GSTR-3B filings) to check whether you followed the correct order of set-off. If not, you may have overpaid GST or blocked credits.

2. Revise Your GST Process:

• Train your accounting team on the new hierarchy
• Update your GST software/ERP to ensure automated compliance with the new order
• Document the reason for any excess credits carried forward

3. Check for Refund Eligibility: If you had filed returns with incorrect set-off order, you may be entitled to claim refund under Section 54 of the CGST Act (read with corresponding provisions in SGST Act). The limitation period is generally 2 years from the date of claim.

4. Plan Forward: For AY 2026-27 onwards:

• Forecast your IGST, CGST, and SGST liabilities and credits monthly
• Ensure adequate IGST generation if you have high inter-state supplies
• Plan for refund claims if any component of credit consistently exceeds liability
• File Form GST RFD-01 timely for refund claims

5. Maintain Proper Documentation: Keep detailed records of:

• Invoices and tax paid by type (IGST, CGST, SGST)
• Output tax liability by type
• Set-off ledger showing the order of adjustment
• Reconciliation between GSTR-2B (input credits) and GSTR-1 (output invoices)

Key Takeaways

• New Hierarchy Effective AY 2026-27: IGST must be set off first, then against combined CGST+SGST, followed by component-wise set-off of CGST and SGST
• Component Segregation: CGST and SGST credits cannot be cross-adjusted—CGST credit can only be used for CGST liability and vice versa
• Refund Planning Essential: Excess credits must be carried forward or refunded; blocking them unnecessarily delays cash recovery
• Audit Your Past Returns: If you made errors in the set-off order in previous years, file amended returns or refund claims within the 2-year limit
• System & Process Update Required: Update your accounting software, train staff, and maintain detailed set-off ledgers to ensure compliance going forward

Important Note: This clarification applies to all GST-registered businesses, whether manufacturers, traders, or service providers. Non-compliance may lead to ITC denial, demand notices, and interest under Section 50 of the CGST Act.

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