GSTN Changes IGST Credit Utilization Rules, Businesses May Face Disputes

The Goods and Services Tax Network (GSTN) has withdrawn a key functionality from the GST portal that previously allowed taxpayers greater flexibility in utilizing Input Tax Credit (ITC) for payment of IGST liabilities. The change is expected to create compliance concerns for businesses and may also trigger disputes regarding the correct sequence of ITC utilization under Section 49 of the CGST Act, 2017. Earlier, based on advisories issued in January and February 2026, taxpayers were permitted to first exhaust available IGST credit and then use SGST credit for payment of IGST liability, even if CGST credit remained unutilized. This mechanism helped businesses optimize cash flow by enabling complete utilization of available ITC balances without additional cash payments.

However, from April 2026, the GST portal discontinued this facility and reverted to the statutory sequence prescribed under Section 49(5)(c) of the CGST Act. Under the law, taxpayers are now required to first utilize CGST credit before applying SGST credit toward IGST liabilities. As a result, businesses can no longer directly use SGST credit after exhausting IGST credit if CGST credit is still available. This return to the original statutory mechanism has created immediate practical implications for taxpayers who had aligned their tax payments with the earlier portal advisory.

The change has also raised concerns regarding GST returns filed during March 2026 using the previous portal-enabled mechanism. Tax authorities may argue that such returns are inconsistent with Section 49(5), which does not permit SGST credit to be utilized toward IGST liability before exhausting CGST credit. Consequently, taxpayers could face interest liability under Section 50 of the CGST Act, along with notices under Sections 73 or 74 for alleged short payment of tax. The issue may further lead to litigation, with taxpayers defending their actions on the basis that they followed the functionality and advisory available on the GST portal at the relevant time, while the Department may insist that statutory provisions override portal-based instructions.

The development once again highlights the legal principle that system advisories and technical functionalities cannot supersede the provisions of the CGST Act. Courts have repeatedly held that statutory law prevails over departmental guidance or portal configurations. In light of this, businesses are now expected to revisit their ITC utilization strategies and ensure strict compliance with the sequencing rules prescribed under Section 49.

Tax experts believe the issue could result in increased departmental scrutiny and future disputes, particularly for taxpayers who relied entirely on the earlier GSTN advisory while filing returns. The latest move by GSTN serves as an important reminder that although portal functionalities may simplify compliance procedures, the ultimate authority continues to rest with the statutory provisions of GST law.