Input Tax Credit Calculation Under GST: Formula & Worked Examples

Input Tax Credit Calculation Under GST

Working out how much GST is actually payable in cash, after adjusting Input Tax Credit, involves more than one subtraction once a business has multiple invoices, different tax rates, or a mix of taxable and exempt supplies. This page sets out the calculation method in layers — starting from the basic formula and building up to the situations that trip most businesses up: multi-rate purchases, the ITC set-off order across tax heads, and apportioning common credit when part of the business deals in exempt supplies.

For the legal conditions a purchase has to meet before it even qualifies for ITC, see Conditions for Claiming Input Tax Credit. For what happens when previously claimed ITC has to be reversed, see ITC Reversal Under GST.

The Basic ITC Calculation Formula

At its simplest, the amount of GST payable in cash for a tax period is:

GST Payable = Output GST − Eligible Input Tax Credit

Quick example:

Purchase Value        ₹1,00,000

GST @ 18%              ₹18,000   (Eligible ITC)

Output GST              ₹30,000

GST Payable = ₹30,000 − ₹18,000 = ₹12,000

This single-invoice version is easy to work out by hand. Real GST returns rarely stay this simple, because a business usually has many invoices at different rates, across different tax heads (CGST, SGST, IGST), in the same period.

Step-by-Step Method for Multiple Invoices

When a business has several purchases in one period, the calculation runs in three stages:

Stage 1 — List every purchase invoice with its GST amount. Only include invoices that meet the conditions for ITC (valid document, goods/services received, reflected in GSTR-2B) and exclude anything falling under blocked credit.

Stage 2 — Add up the eligible GST across all invoices, separately for each tax head. CGST, SGST, and IGST are tracked separately because they cannot always be freely interchanged when adjusting against output tax.

Stage 3 — Subtract the total eligible ITC (head-wise) from the output tax for that head, following the prescribed set-off order.

Worked Example: Multiple Invoices, Single Rate

A retailer has three purchase invoices in a month, all intra-state at 18% GST:

If output GST for the month is ₹40,000 (₹20,000 CGST + ₹20,000 SGST), and the full ₹23,400 (₹11,700 CGST + ₹11,700 SGST) is eligible:

CGST payable = ₹20,000 − ₹11,700 = ₹8,300

SGST payable = ₹20,000 − ₹11,700 = ₹8,300

Total GST payable in cash = ₹16,600

The ITC Set-Off Order

ITC is not adjusted head-to-head on a free-for-all basis. GST law prescribes a specific order in which credit under each head must be used:

1. IGST credit is used first against IGST liability, then against CGST liability, then against SGST/UTGST liability.
2. CGST credit is used against CGST liability, and only after IGST credit is exhausted, against IGST liability. CGST credit cannot be used against SGST/UTGST liability.
3. SGST/UTGST credit is used against SGST/UTGST liability, and only after IGST credit is exhausted, against IGST liability. SGST/UTGST credit cannot be used against CGST liability.

Worked Example: Set-Off Order

A business has the following credit and liability position for a month:

Step 1: IGST credit (₹15,000) first sets off IGST liability (₹10,000) → ₹5,000 IGST credit left

Step 2: Remaining IGST credit (₹5,000) can go towards CGST or SGST liability, split as needed

   → say ₹5,000 applied to CGST liability

Step 3: CGST credit (₹8,000) + remaining IGST (already used above) sets off CGST liability

   → CGST liability ₹12,000 − ₹5,000 (IGST) − ₹7,000 (CGST credit) = ₹0, with ₹1,000 CGST credit left over

Step 4: SGST credit (₹8,000) sets off SGST liability (₹12,000)

   → SGST payable in cash = ₹12,000 − ₹8,000 = ₹4,000

Only ₹4,000 needs to be paid in cash for the month, even though the total output liability was ₹34,000, because credit under one head was used to cover a shortfall in another, subject to the prescribed sequence.

Calculating Common Credit for Taxable and Exempt Supplies

A business that makes both taxable and exempt supplies cannot claim full ITC on inputs and input services used for both. Rule 42 of the CGST Rules prescribes a formula to work out how much of this "common credit" is eligible and how much must be reversed.

The Formula

T  = Total ITC on inputs and input services for the period

T1 = ITC used exclusively for non-business purposes

T2 = ITC used exclusively for exempt supplies

T3 = ITC blocked under Section 17(5)

C2 = T − T1 − T2 − T3   (this is the "common credit")

D1 = (E ÷ F) × C2

     where E = value of exempt supplies during the period

           F = total turnover during the period

D2 = 5% of C2   (deemed reversal for non-business use)

Eligible common credit = C2 − D1 − D2

D1 and D2 are added to output tax liability for the period; the eligible common credit is what the business can actually retain.

Worked Example: Common Credit Apportionment

A manufacturer produces both taxable goods and an exempt product line. For a given month:

Total common ITC (T)             ₹4,80,000

Exclusively taxable (T1)         ₹2,40,000

Exclusively exempt (T2)            ₹80,000

Blocked under Section 17(5) (T3)   ₹0

Common credit (C2 = T − T1 − T2)  ₹1,60,000

Exempt turnover (E)              ₹20,00,000

Total turnover (F)               ₹50,00,000

D1 = (20,00,000 ÷ 50,00,000) × 1,60,000 = ₹64,000

D2 = 5% × 1,60,000 = ₹8,000

Eligible common credit = 1,60,000 − 64,000 − 8,000 = ₹88,000

The business retains the full ₹2,40,000 that was exclusively for taxable supplies, plus ₹88,000 of the common credit — a total of ₹3,28,000 out of the original ₹4,80,000 pool. The reversed amount (₹72,000) is added to output tax liability. This calculation is done provisionally every month and trued up annually using full financial-year figures.

Capital goods used for both taxable and exempt supplies follow a related but separate formula under Rule 43, spread over a 60-month useful life rather than reversed in one go — covered in detail on Input Tax Credit on Capital Goods.

Quick Reference: What to Include and Exclude Before Calculating

Frequently Asked Questions

What is the basic formula to calculate Input Tax Credit payable?

GST payable in cash equals output GST for the period minus the eligible Input Tax Credit, calculated separately for each tax head (CGST, SGST, IGST) and adjusted in the prescribed set-off order.

Can CGST credit be used to pay SGST liability?

No. CGST credit can only be used against CGST and IGST liability; it cannot be used to pay SGST or UTGST liability, and vice versa.

How is ITC calculated when a business has both taxable and exempt supplies?

The common credit on shared inputs and input services is apportioned using the Rule 42 formula, based on the ratio of exempt turnover to total turnover, with an additional 5% deemed reversal for non-business use.

Is ITC calculation different for capital goods used in exempt supplies?

Yes. Capital goods used for both taxable and exempt supplies follow Rule 43, where the reversal is spread proportionately over a 60-month useful life rather than calculated as a one-time figure.

Does the ITC set-off order affect how much cash a business actually pays?

Yes. Because IGST credit must be exhausted before certain other credits can be used across heads, the sequence in which credit is applied can change how much is paid in cash, even when the total credit and total liability are the same.