If you’ve ever filed GSTR-3B, you already know how important the ITC utilisation part is. This is the place where people get confused almost every month — how to use ITC? Which tax gets adjusted first? Why some ITC is not being set off? Why the portal is showing “insufficient balance” even when ITC exists?
Plus, there are extra complications like:
- Rule 86A → blocking of ITC
- Rule 86B → paying at least 1% cash
- Ledger management mistakes
- Wrong utilisation
- Negative ITC
- Frozen credit
So this blog will break down everything into simple explanation so you can use your Electronic Credit Ledger (ECL) like a pro.
1. What Is Section 49?
Section 49 is the backbone of GST payments. It tells you:
- how to make payments
- how ITC is utilised
- how credit ledger works
- order of utilisation
There are 3 important ledgers in GST:
✔ Electronic Cash Ledger
Where you deposit money.
✔ Electronic Credit Ledger
Where all ITC sits (CGST, SGST, IGST).
✔ Electronic Liability Ledger
Where your tax liability shows up.
Understanding these three is essential before using ITC.
2. Electronic Credit Ledger (ECL) – Where Your ITC Lives
Your ITC gets credited into the ECL based on GSTR-2B.
The ECL has three boxes:
- IGST Credit Ledger
- CGST Credit Ledger
- SGST Credit Ledger
Each has separate rules for utilisation. You cannot merge or interchange them.
3. ITC Utilisation Rules – Section 49(5)
This is the most important area.
Let’s understand the utilisation table in human language.
4. Order of Utilisation (Super Simplified Chart)
✔ IGST ITC must be used first
- IGST → IGST, then
- IGST → CGST, then
- IGST → SGST
✔ CGST ITC cannot be used for SGST
- CGST → CGST, then
- CGST → IGST
✔ SGST ITC cannot be used for CGST
- SGST → SGST then
- SGST → IGST
❌ CGST ≠ SGST cross-utilisation
They never mix.
This is the rule that confuses most beginners.
5. Simple Example to Understand Utilisation
Suppose in a month:
- IGST ITC = ₹60,000
- CGST ITC = ₹20,000
- SGST ITC = ₹20,000
Your output tax liability:
- IGST = ₹30,000
- CGST = ₹40,000
- SGST = ₹40,000
Step 1: Use IGST first
- IGST liability = 30,000 → set off from IGST ITC
- Remaining IGST ITC = 30,000
- Now IGST ITC → CGST
- Set off 30,000 against CGST 40,000
- CGST balance liability = 10,000
Step 2: Use CGST ITC
- CGST ITC = 20,000
- Set off 10,000
- Remaining CGST ITC = 10,000 (unused)
Step 3: SGST
- SGST liability = 40,000
- SGST ITC = 20,000
- Remaining SGST liability = 20,000 → must pay cash
Important:
CGST ITC cannot be used for SGST. That’s why CGST ITC of ₹10,000 remains unused.
6. Why IGST ITC Is the Most Powerful
Because IGST ITC can be used:
- for IGST
- for CGST
- for SGST
Whereas:
- CGST can’t pay SGST
- SGST can’t pay CGST
This is why businesses try to have more IGST purchases, so ITC becomes more flexible.
7. Mistakes People Make in Utilisation
- Forgetting IGST ITC must be used first
- Thinking SGST can pay CGST
- Thinking blocked credit appears in ledger
- Not checking GSTR-2B before claiming
- Taking ITC from GSTR-2A
- Using wrong values in Table 4 of GSTR-3B
8. Rule 86A – ITC Blocking (Frozen Credit)
This is a scary rule for many businesses, so let’s explain it without fear.
What is Rule 86A?
It allows the GST department to block your ITC in the ECL if they believe ITC is:
- fraudulently availed
- coming from fake invoices
- from non-existent supplier
- from supplier not paying GST
- mismatched invoices
- suspicious transactions
Once blocked, ITC becomes non-usable, even if it appears in your ledger.
9. When Can ITC Be Blocked (Simple List)
ITC can be blocked if:
- Supplier didn’t file GSTR-3B
- Supplier didn’t pay GST
- Supplier exists only on paper
- Fake invoice/fake GST number
- Invoice issued without supply
- Unusual large ITC in comparison to turnover
- Suspicious transactions or mismatches
This blocking is temporary, but highly troublesome.
10. How Long Can ITC Remain Blocked?
Blocked ITC under Rule 86A stays frozen for up to 1 year.
After that, it automatically unblocks unless department passes another order.
Example of blocking:
- You have IGST ITC = ₹4,00,000
- Dept blocks ₹3,50,000
- You can use only ₹50,000.
11. Can You Challenge ITC Blocking?
Yes, through:
- Online grievance
- Letter to jurisdictional officer
- Appeal
- Writ petition in High Court (if blocking is arbitrary)
12. Rule 86B – 1% Minimum Cash Payment Rule
This rule forces certain businesses to pay minimum 1% of output tax in cash, even if they have much ITC.
This rule applies when:
“Your monthly taxable turnover ≥ ₹50 lakh”
Then:
- You cannot pay 100% of tax using ITC
- At least 1% must be paid in cash
This restricts full ITC utilisation.
13. Who Is Exempt from Rule 86B?
Rule 86B does NOT apply if:
- The entity has paid > ₹1 lakh income tax in last 2 years
- You are government department/PSU/local authority
- You are claiming refund under inverted duty structure
- You imported goods and paid IGST
- Director/partner has paid income tax > ₹1 lakh in last 2 years
So most genuine businesses are safe.
14. Example of Rule 86B
- Your GST liability = ₹10,00,000
- You have ITC = ₹9,00,000
Since turnover > ₹50 lakh/month:
You must pay at least: 1% of 10,00,000 = ₹10,000 in cash.
Remaining 9,90,000 can be paid using ITC.
15. Ledger Mismanagement Issues
Some common mistakes:
- Claiming wrong ITC → ECL inflated
- Not matching ITC with GSTR-2B
- Using ITC from previous year wrongly
- CGST and SGST imbalance
- Refund of wrong credit
- Negative ITC (due to wrong reversal)
16. Cross-Utilisation Mistakes That Lead to Notices
- Using CGST to pay SGST
- Using SGST to pay CGST
- Using ineligible ITC
- Using ITC blocked under 17(5)
- Wrong reporting in Table 4 of GSTR-3B
17. How to Manage Ledgers Smartly (Practical Tips)
- Always reconcile GSTR-2B before claiming ITC
- Exhaust IGST ITC first
- Avoid unnecessary SGST ITC accumulation
- Maintain vendor compliance (GSTR-1 & 3B)
- Track reversals under Rule 42, 43
- Watch out for duplicate ITC
- Maintain proper audit trail
- Keep eye on suspicious vendors
18. Summary of ITC Utilisation Rules
Here is the whole thing in one simple sentence:
“Use IGST first → Then use CGST/SGST for their own liabilities → Never mix CGST & SGST → Beware of ITC blocking & 1% cash rule. ”
This is the heart of utilisation.
19. Final Human-Friendly Summary
ITC utilisation and ledger management look complicated only on paper. Once you understand:
- ECL
- Order of utilisation
- Rule 86A (ITC block)
- Rule 86B (1% cash rule)
- Section 49
…everything becomes manageable.
The biggest reason people get notices is:
- wrong utilisation
- wrong supplier
- mismatch in GSTR-2B
- blocked credit used
- or Rule 86B ignored
If you follow the correct order and maintain clean ledgers, you will never face ITC problems.
