The Indian GST system continues to evolve to make compliance more business-friendly and to improve cash flow management. One of the most significant updates is the change in Input Tax Credit (ITC) utilisation rules for IGST liabilities, effective January 2026.
This update may seem technical, but its implications are far-reaching, giving businesses more flexibility, strategic control, and improved cash flow management.
The Previous ITC Utilisation Rules
Prior to January 2026, ITC utilisation followed a strict legal hierarchy:
- IGST ITC – must be used first for IGST liability.
- CGST ITC – can be used only after IGST ITC is exhausted.
- SGST ITC – can be used only after both IGST and CGST ITC are exhausted.
This sequence was enforced by system controls in the GST portal, leaving no room for taxpayer discretion. Even if a company had higher SGST or CGST balances, it could not leverage them strategically.
Challenges under the old system:
- Cash flow constraints due to forced credit utilisation sequence.
- Inability to optimise ITC utilisation based on business needs.
- Higher administrative burden in planning payments.
The New ITC Utilisation Rules from January 2026
The government has now introduced flexibility for CGST and SGST ITC utilisation, while maintaining the priority of IGST ITC.
Key changes:
- IGST ITC is still first: No change here; IGST ITC must always be utilised before other credits.
- Flexibility for remaining liability: Once IGST ITC is fully used, businesses can decide how much CGST or SGST ITC to use to pay remaining IGST liability.
- Choice in order: Taxpayers can use CGST and SGST in any sequence, allowing strategic allocation of credits.
This marks a shift from a rigid, legally mandated sequence to a flexible, business-centric approach.
Why This Matters for Businesses
The change has several practical advantages:
- Enhanced Cash Flow Management: Businesses can now allocate credits to minimise cash outflow or maintain liquidity for operations.
- Optimised Credit Usage: Companies can strategically decide how much CGST or SGST ITC to utilise to avoid expiry of credits or maintain balanced credit accounts.
- Simplified Compliance: The GST portal’s flexibility reduces the need for manual calculations or adjustments, making compliance easier.
- Financial Planning & Control: Businesses can plan credit utilisation for upcoming liabilities, ensuring they don’t face a shortfall in either state or central taxes.
Practical Examples
Example 1:
A company has the following ITC balances:
- IGST ITC: ₹50,000
- CGST ITC: ₹30,000
- SGST ITC: ₹20,000
Old system:
- IGST ITC is consumed first.
- Remaining IGST liability automatically draws from CGST and then SGST.
New system:
- IGST ITC still used first.
- Company can choose any proportion of CGST and SGST ITC for remaining liability.
- This allows them to maintain a preferred balance for state vs central credits, depending on upcoming GST needs.
Example 2 – Cash Flow Strategy:
- Company expects a large SGST refund in 2 months.
- By using CGST ITC now (instead of SGST), they preserve SGST balance and maintain flexibility.
This demonstrates how businesses can align ITC utilisation with financial strategy rather than being forced by law.
Key Points to Remember
- IGST ITC must always be used first.
- Flexibility applies only after IGST ITC is fully utilised.
- Businesses can choose how much CGST or SGST ITC to use.
- This update applies to GST payments from January 2026 onwards.
- Strategic planning can optimise cash flow and ITC management.
Tips for Businesses to Make the Most of the New Rules
- Regularly Monitor ITC Balances: Track IGST, CGST, and SGST credits in real time to plan utilisation effectively.
- Plan for Upcoming Liabilities: Consider upcoming GST payments to decide which credits to use first after IGST ITC.
- Coordinate with Finance Teams: Ensure your accounting and tax teams are aligned for optimal ITC utilisation.
- Leverage the GST Portal Features: Use the flexibility provided in the portal to strategically allocate credits rather than defaulting to a fixed sequence.
- Document Decisions for Compliance: Maintain proper records of ITC allocation choices to avoid disputes during audits.
Benefits at a Glance
| Benefit | How It Helps |
| Cash Flow Management | Businesses can free up cash by choosing which credits to apply. |
| Strategic ITC Use | Optimise state vs central credit utilisation. |
| Simplified Compliance | Reduced manual calculations and administrative work. |
| Improved Financial Control | Better planning for upcoming liabilities and ITC management. |
Conclusion
The January 2026 update to IGST ITC utilisation rules is a game-changer for businesses. By introducing flexibility in the use of CGST and SGST ITC, the government has empowered businesses to:
- Optimise cash flow,
- Strategically manage tax credits, and
- Simplify compliance processes.
For finance teams and business owners, this isn’t just a procedural change—it’s a strategic tool to make GST compliance more efficient and business-friendly.
Businesses that proactively plan their ITC utilisation under the new rules will see tangible benefits in liquidity, tax planning, and financial control.
