Q.State the concept of Input Tax Credit and explain the general order in which it is set off against output tax liability.

Input Tax Credit lets a registered dealer reduce the GST payable on sales by the GST already paid on purchases, so tax is not paid twice on the same value.

The concept. Input Tax Credit (ITC) is the credit a registered dealer earns for the GST already paid on business purchases (inputs), which can be applied to reduce the GST that has to be paid on the dealer's own sales (outputs). Rather than treating GST paid on a purchase as a straightforward cost, the dealer records it as a recoverable credit balance, because it will be set off against the output tax liability arising from sales made using those very purchases.

Why it exists. Without ITC, a dealer would pay full GST on sales without any relief for GST already paid on purchases, which is exactly the tax-on-tax cascading problem GST was designed to solve. ITC ensures that GST is, in substance, payable only on the value the dealer personally adds, not on the gross sale value.

The general set-off order. For an introductory treatment, the order is: (1) Input CGST is set off first against Output CGST; (2) Input SGST is set off first against Output SGST; (3) Input IGST is set off first against Output IGST. If, after fully covering its own head's liability, any IGST credit still remains, that surplus can then be used to reduce a shortfall in CGST or SGST liability, in whichever combination is needed. Only after every available credit — same-head first, then any spare IGST — has been applied does the dealer pay the remaining liability, if any, in cash. If credit exceeds liability instead, the surplus is carried forward rather than refunded immediately or lost. …