Input Tax Credit (ITC)

The input tax credit is one of the most important parts of GST and so in this article, we have answered some basic questions about ITC like conditions for availing the ITC, the manner of utilizing ITC, the time limit for availing the ITC and we have also explained with the detailed list of items on which ITC could not be availed.

 

What is Input Tax Credit (ITC) Under GST?

 

ITC is the tax paid on the purchases which is reduced from tax to be paid on sales. Let’s try to understand this with an example.

 

Example – Mr Kumar has purchased a product costing Rs.120 (100 cost + 20 GST) and sold it for Rs. 190 (150 cost + 40 GST)

Thus GST to be paid will be as follows-
Output tax                 40
(-) Input tax              (20)

Total GST payable    20

 

In the earlier law, it was not possible to take credit of VAT while making payment of service tax or excise duty, this cascading effect or double taxation has been removed under GST Law.

There is no one-on-one matching of credit under GST Law, ITC on service received could be utilized for making payment of GST on goods sold.

 

How To Utilize The Input Tax Credit?

In GST we have three types of taxes CGST, IGST, and SGST/UTGST.
For the inter-state supply of goods/ services, IGST is charged.
and for the intra-state supply of goods/services CGST and SGST/UTGST are charged.

 

While making payment for the above taxes, input tax credit will be allowed in the following manner-

Credit	1st to be utilized for payment of	Balance if any
CGST	CGST	IGST
IGST	IGST	CGST and then SGST/UTGST
SGST/UTGST	SGST/UTGST	IGST

 

What Are The Conditions For Availing Of The Input Tax Credit?

1) The person availing the ITC should have the following documents

• Tax invoice
• Debit note
• Bill of entry
• Invoice issued under reverse charge mechanism
• Document issued by the ISD

2) Goods or services that are received

3) ITC would be available only if the GST is paid by the supplier

4) Return in form GSTR-3 (i.e. monthly return) has been furnished by the supplier

 

Frequently Asked Questions (FAQs) On Input Tax Credit (ITC)

Q1. Who can avail of the Input tax credit?

For availing of the input tax credit, the person is required to be registered under GST Law, and goods or services received must be used for his business purpose.

Read more about the GST Registration Process

 

Q2. What is the manner of availing ITC On Capital goods?

Unlike earlier Laws,100% of the credit is allowed in the 1st year of purchases. If the depreciation is charged on the GST portion(i.e. credit) of capital goods, ITC will not be allowed.

 

Example:

Cost    GST   Total cost    Deprecation charged on     ITC available
500      50       550                  550                                     nil
500      25       525                  500                                     25

 

Q3. What is the time limit for of availing ITC?

The time limit for availing of ITC will be earlier than the following-

a) Furnishing of annual return or

b) The due date for filing the monthly return (GSTR-3) for the next financial year is September month.

Example- For the invoice dated 10/11/2017, ITC must be availed earlier the following dates –
The due date for September 2018 return – 20th October 2018
Annual return filed (assumed) – 10th November 2018
Thus till 20th October 2018, ITC must be availed.

 

12 Important Things To Note About ITC

1. For advance payment, the supplier is required to pay tax on such advance receipt but in the case of the recipient, he can avail of the ITC only when a tax invoice is issued and goods/services are received.
2. ITC cannot be availed based on a photocopy of the valid document.
3. SGST paid in one state cannot be utilized as credit for payment of SGST in another state.
4. For payment of interest and penalty Input tax credit cannot be utilized in other words it should be paid using an electronic cash ledger.
5. For claiming  ITC goods/ services must be received. Hence the goods or services received by the agent or the job worker will be assumed to be received by the recipient.
6. On receipt of the invoice by the recipient, the invoice amount must be paid within 180 days from the date of invoice. If the recipient fails to pay, the amount taken as credit will be reversed and output tax will be payable on such amount. Yet on a later date, if the recipient pays the invoice amount, he can again claim the credit.
7. On filing the form GSTR-2 (inward supplies details) by the recipient, the credit claimed in the return will be credited to the electronic credit ledger on a provisional basis. The recipient can file Form GSTR-3 and pay self-assessed tax by taking credit of input available in the electronic credit ledger. After filling out form GSTR-3 both supplier and recipient system carries out the matching process. If the supplier has paid the tax on the goods/services, ITC will be allowed to the recipient. In case during the matching process, any mismatch is found due to
   a) duplication of claim or
   b) If the input claimed by the recipient is more than the output declared by the supplier,
   then, the excess amount will be added to the output tax liability of the recipient and the tax amount will be required to be paid along with the interest.
8. In case goods (inputs and Capital goods both) have been received in installments or lots against a single invoice then input can be availed on the receipt of the last installment or lot.
9. GST paid under reverse charge can also be utilized as ITC.
10. If goods or services purchased/received are used for both business and non-business purposes, then only part of ITC relating to goods/services used for business purposes will be allowed as a credit. Even in the case of taxable and exempted goods/services, only the part relating to taxable goods/services will be allowed as a credit.
11. For voluntary registration, a person is entitled to take credit for goods held on the previous day on which registration has been granted.
12. In the case of compulsory registration, the person takes the registration within 30 days of becoming liable
    Then he is entitled to take credit of
    a. Inputs held in stock
    b. Inputs contained in semi-finished or
    c. Finished goods held in stock
    On the day previous day from which he becomes liable to pay tax i.e. date on which he is liable for registration.

 

List Of Items On Which Input Tax Credit Cannot Be Availed

S.no.	Items	Exceptions
1	Credit on Motor vehicles and other conveyances purchased or Expenses related to the normal use of motor vehicles for office purposes cannot be claimed as an input tax credit.	TA taxable person is in the business of the sale and purchase of  new or second-hand motor vehicles i.e Dealer of the motor vehicle or Providing the service of transportation of passengers(Ola, Uber)/ goods(GTA) or The motor vehicle is used by the driving school.
2	Supply of food and beverages, outdoor catering, beauty treatment, health service, and cosmetic and plastic surgery	If an inward supply of aforesaid goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply then the input tax credit will be available. Example- When the outdoor catering service is subcontracted then the main contractor can avail input on tax charged by the sub-contractor because the service received is used for making the outward supply of the same category.
3	Rent-a-cab, Life, and health insurance	The Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force or The receiver of service provides the same line or category of service example- The government made a law for the companies to provide cab facilities for female employees.
4	Travel benefits employees as leave or home travel concession Example – Tour arranged for the employee
5	Works contract service for construction of immovable property	Works contractor uses the service of another contractor, then the former can claim the ITC.
6	Construction of immovable property which includes reconstruction, renovation, additions, or repairs. Goods/services used for construction on his account or even when it is used for the furtherance of business. Example- Mr.A constructing his own office, ITC on goods or services used for the construction of the office cannot be claimed by Mr.A
7	ITC will not be available for the goods/services received by the non-resident taxable person.	In case if Non-resident taxable person imports goods or services, then ITC will be allowed.
8	Goods/services received for personal consumption
9	Goods stolen /destroyed/ written off/distributed as a gift or free samples
10	Dealer under composition scheme- Neither the dealer nor the receiver of goods from the dealer can claim ITC
11	Membership in a club, Health, and Fitness center for example– Company pays the gym fees for its employees

 

Conclusion

In essence, navigating the complexities of Input Tax Credit (ITC) in the realm of GST is pivotal for businesses today.

This article delves into crucial aspects such as conditions for availing input tax credit, the utilization process, and the associated time limits.

By highlighting the significance of input tax credit, the piece underscores its role in eliminating cascading effects and double taxation, bringing a more streamlined approach to tax credits.

Moreover, a comprehensive list of items on which input tax credit cannot be availed is presented, offering valuable insights into potential limitations and exclusions.

As businesses evolve in the dynamic landscape of GST, a thorough understanding of input tax credit becomes not just a compliance necessity but a strategic imperative for sustainable growth.