GST Liability Set Off Checklist Before Filing GSTR-3B

How GST Liability Set Off Works

The utilisation order is governed by Sections 49, 49A and 49B of the Central Goods and Services Tax Act, 2017, read with Rule 88A of the Central Goods and Services Tax Rules, 2017.

IGST credit must be fully exhausted before CGST or SGST credit is used. CGST and SGST credit must first pay their respective own-head liabilities before being used against residual IGST liability. Direct cross-utilisation between CGST and SGST is not allowed.

What Changed in ITC Utilisation From February 2026

GSTN Advisory 647 , issued on 30 January 2026, announced several GSTR-3B portal enhancements. GSTN Advisory 649 later clarified that the revised credit-selection facility would be available from the February 2026 tax period.

Once IGST credit is fully exhausted, the portal now allows taxpayers to select how eligible CGST and SGST credit will be used against residual IGST liability. CGST may be used first, SGST may be used first, or both may be used in a selected proportion.

This is a portal functionality change. It does not change the legal requirement to exhaust IGST credit first or the prohibition on direct cross-utilisation between CGST and SGST.

Practical point: The selected sequence may change the closing CGST and SGST credit balances without changing the current month’s cash payment. Choose the sequence after reviewing the expected mix of future intra-state and inter-state liabilities.

Pre-Filing GST Liability Set Off Checklist

1. Finalise the Outward Tax Liability

Reconcile taxable sales, debit notes and credit notes in the books with GSTR-1 or the Invoice Furnishing Facility. Check the tax rate, place of supply , supply type and state-wise reporting before finalising the liability in GSTR-3B .

Where a same-period correction is required after filing GSTR-1 or IFF, file GSTR-1A before GSTR-3B. Recheck the auto-populated figures after the amendment is filed.

The relevant auto-populated outward-supply values in Table 3.1 became non-editable from the July 2025 tax period. Table 3.2, covering specified inter-state supplies to unregistered persons, composition taxpayers and UIN holders, became non-editable from the November 2025 tax period. 

Corrections for the same period must therefore be made through GSTR-1A before finalising the liability in GSTR-3B. Before moving to ITC, confirm that:

• The sales register matches GSTR-1 and GSTR-1A.
• Credit and debit notes are reported in the correct period.
• Table 3.1(d) includes the complete reverse-charge liability.
• Table 3.2 agrees with the state-wise outward-supply records.
• Earlier-period supplies reported in the current return have been identified.

Once GSTR-3B is filed, GSTR-1A for that period is no longer available. A later correction must follow the route permitted for that specific error.

2. Reconcile Eligible ITC

Review the relevant records in the Invoice Management System . If an action is taken after GSTR-2B is generated, recompute GSTR-2B before filing GSTR-3B. Review the credit under four areas:

• Document matching: Confirm the supplier GSTIN , invoice number, invoice date, taxable value and tax amount.
• Eligibility: Verify receipt of goods or services, the Section 16 time limit and restrictions under Section 17(5).
• Reversals and reclaims: Check Rules 37, 37A, 42 and 43, along with any earlier temporary reversals .
• Separate credit categories: Verify imports, Input Service Distributor credit and reverse-charge credit against their supporting documents.

Note: Credit restricted under Rule 86A should not be included in the amount available for set-off.

An invoice appearing in GSTR-2B is not automatically eligible for ITC. The taxpayer must also satisfy the applicable conditions under Sections 16 and 17. 

Also review the Electronic Credit Reversal and Reclaimed Statement and the RCM Liability and ITC Statement. GSTN Advisory 643 explains the portal controls applied to reversals, reclaims and reverse-charge credit.

3. Separate Cash-Only Liabilities

The electronic credit ledger may be used only for eligible output tax. It cannot pay every amount appearing in GSTR-3B.

Reverse-charge tax is excluded from the definition of output tax. Circular No. 172/04/2022-GST therefore confirms that it cannot be paid through the electronic credit ledger. The same circular states that interest, penalty, fees and other non-tax amounts must also be paid in cash.

Paying reverse-charge tax in cash does not automatically create ITC. The credit may be claimed only when the tax has been paid, and all applicable ITC conditions are satisfied .

4. Prepare the Head-Wise Set-Off Working

Prepare an independent working before accepting the portal’s suggested utilisation. Using the utilisation order above, prepare a head-wise working that shows:

• Available ITC under each head.
• Credit used against each liability.
• Cash-only liabilities.
• The Rule 86B cash requirement, where applicable.
• Closing credit and cash balances.

Compare the completed working with Table 6.1 before offsetting. The portal suggestion should not replace the reviewer’s calculation.

5. Check Rule 86B

Rule 86B generally applies where the value of taxable supplies, excluding exempt and zero-rated supplies, exceeds ₹50 lakh in a month.

Where the rule applies, the electronic credit ledger generally cannot be used to pay more than 99% of the output-tax liability. At least 1% must be paid through the electronic cash ledger unless a prescribed exception is available.

The ₹50 lakh threshold is a monthly taxable-supply test. It is not based on annual turnover.

Common exceptions cover specified income-tax payments, eligible refunds, sufficient cumulative cash payment during the financial year, specified government entities and permission from the authorised officer.

Notification No. 20/2025-Central Tax added another limited exception from 1 February 2026. It applies to eligible registered persons other than manufacturers dealing in specified Rule 31D goods where tax has already been paid by the supplier based on the retail sale price. Keep the calculation and supporting evidence where an exception is claimed.

6. Verify the Cash Ledger and Interest

The electronic cash ledger is maintained separately under IGST, CGST, SGST/UTGST and cess. Each major head is further divided into tax, interest, penalty, fee and others. A balance cannot be directly used against a different major or minor head. Form GST PMT-09 can be used to transfer an eligible cash balance from one head to another. 

From the January 2026 tax period, GSTN enhanced the interest calculation in Table 5.1 to consider the minimum cash balance maintained from the return due date until the date of tax payment, in line with Rule 88B(1). The system-generated amount should still be compared with the taxpayer’s own calculation.

Interest is charged at 18% per annum under Section 50(1) on delayed tax. Interest under Section 50(3) is also charged at 24% per annum where ITC has been wrongly availed and utilised. Mere wrong availment without utilisation does not attract interest. Notification No. 13/2017-Central Tax , as retrospectively amended by Section 116 of the Finance Act, 2022, prescribes the rate, while Rule 88B(3) explains how the interest is calculated. 

If the system-computed interest appears incorrect and the portal provides a recomputation option, recompute it and check the updated system-generated GSTR-3B PDF.

Money deposited in the electronic cash ledger is not treated as payment of tax until the ledger is debited against the relevant liability.

7. Offset, Confirm and File

Download the return preview and compare it with the approved working. Check Table 3, Table 4, Table 5.1 and Table 6.1 before selecting “Offset Liability”. After offsetting:

1. Confirm that the electronic credit and cash ledgers have been debited correctly.
2. Review and save the Tax Liability Breakup tab where it is displayed or required.
3. Download the updated return summary.
4. Complete filing using the Digital Signature Certificate or Electronic Verification Code.

Retain the set-off calculation, ledger extracts, GSTR-2B reconciliation , Rule 86B working, interest calculation, and approved return preview with the monthly GST records.

Worked Example: Choosing CGST or SGST Credit Against IGST

Imagine Vertex Polymer Works is a Pune-based manufacturer that is supplying distributors in Gujarat, Karnataka and Telangana. The following figures relate to its June 2026 GSTR-3B:

First, use ₹3,00,000 of IGST credit against the IGST liability. This leaves an IGST liability of ₹3,00,000.

Next, use ₹2,50,000 of CGST credit against the CGST liability and ₹2,50,000 of SGST credit against the SGST liability. The remaining credit is:

• CGST credit: ₹2,00,000
• SGST credit: ₹2,00,000

The residual IGST liability of ₹3,00,000 may then be paid using the remaining CGST and SGST credit in different combinations.

The current output-tax cash payment is nil under all three options. In this example, the selected sequence changes only the closing CGST and SGST credit balances.

The reviewer should consider expected future liabilities before choosing a sequence. An equal division is not automatically the most useful option.

Conclusion

A reliable GST liability set off begins with accurate outward-tax reporting and a complete ITC reconciliation. It also requires cash-only liabilities, Rule 86B, ledger balances and interest to be reviewed before the payment screen is confirmed.

The final control is to compare the portal utilisation with the approved head-wise working, save the Tax Liability Breakup and download the final return preview. Following this order reduces the risk of using the wrong tax head, claiming unsupported credit, or delaying filing because of insufficient cash.