Goods and Services Tax (GST) is considered the biggest reforms in India. However, one thing that has become the talking point is the mechanism of input credit under GST.
In simple words, Input Credit means at the time of paying tax on sales, you can reduce the tax you have already paid on purchases.
In this article, we’ll cover all you need to know about Input Tax Credit (ITC) under GST, the time limit to avail ITC, how to calculate Input Tax Credit, how to claim ITC, the situation where you can not avail ITC and much more.
What is Input Tax Credit (ITC)?
Input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.
The concept is not entirely new as it already existed under the pre-GST indirect taxes regime (service tax, VAT and excise duty). Now its scope has been widened under GST.
Earlier, it was not possible to claim input tax credit for Central Sales Tax, Entry Tax, Luxury Tax and other taxes. In addition, manufacturers and service providers could not claim the Central Excise duty.
During the pre-GST era, cross-credit of VAT against service tax/excise or vice versa was not allowed. But under GST, since these taxes will be subsumed into one tax, there will not be the restriction of setting off this input tax credit.
The conditions to claim Input Tax Credit under GST is a very critical activity for every business to settle the tax liability.
Input Tax Credit can’t be applied to all type of inputs, each state or a country can have different rules and regulations. Input Tax Credit is also viable to a dealer who has purchased good to resale.
Tax Credit is the backbone of GST and for registered persons is a major matter of concern. This is majorly in line with the pre-GST regime. These rules are quite stringent and particular in their approach.
Say for instance that you are a manufacturer. The tax to be paid on the final product is INR 450. The purchase tax paid is INR 300. The input credit you claim is INR 300, and the final taxes you will pay is INR 150.
What is the time limit to avail GST ITC?
ITC can be availed by a registered taxable person in a specific manner and within a specified time frame. The table below shows the different situations wherein the inputs can be claimed for semi-finished goods or stock or finished goods.
|Situation||ITC claims day for semi-furnished goods/stock/finished goods (held on immediate preceding day)|
|If a person has applied for registration or is liable to register or is granted registration||Day from when he is liable to pay taxes|
|When a person takes voluntary registration||Registration day|
|When a taxable registered person stops paying taxes in composition levy scheme||Day from when he is liable to pay tax normally u/s 7.|
Input tax credit for the above-mentioned situations can be claimed only if it does not exceed one year from the tax invoice date of issue related to supply.
For any other cases, ITC must be claimed earlier of the following-
a) Furnishing of annual return or
b) Due date of filing the monthly return (GSTR-3) for the next financial year’s September month.
Example- For the invoice dated 10/11/2017, ITC must be availed earlier of 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.
How to calculate Input Tax Credit?
Lets consider an example on how to calculate Input Tax Credit:
Suppose you have a business. The service or product you sell attracts a tax of 18%. You use input services or goods during your business. The tax due from you (of 18%) can be adjusted to the taxes paid already by you on the purchase of such inputs. The manufacturers add taxes only for the value addition done and not on the total product value.
Lets consider an example of a steel utensils manufacturer who manufactures utensils like spoons, plates, etc. Assume that the manufacturer had bought an INR 500 worth of raw steel to make a pressure cooker and INR 100 worth other raw materials. Lets assume that the GST for steel is 18%. Also, assume that the GST he paid is 28% of other raw materials.
Hence, the manufacturer has paid Rs. 28 on other raw materials and Rs. 90 on raw steel which he used as inputs.
So, the total input tax paid was INR 118 by the manufacturer.
Now, after considering the cost of manufacturing steel pressure cooker using the raw materials and including a decent profit, he decided to sell the pressure cooker to a distributor at INR 800 + GST.
Assume that the steel utensil attracts a GST of 18%.
Now the tax on it will be INR 144. So the manufacturer will invoice the pressure cooker for INR 944.
Hence, the manufacturer is collecting INR 144 as GST on sale from the distributor. The manufacturer had paid INR 118 towards GST during the purchase of his input raw materials. Hence, out of INR 144 of GST, the manufacturer can now claim a credit of INR 118 which he already paid towards GST for inputs and deposit the difference of INR 26 with the government.
This tax credit is available at all succeeding stages, retailers and distributors charge GST and can claim the Input Tax Credit.
How to claim Input Tax Credit (ITC)?
The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:
- One must be a registered taxable person.
- One can claim Input Tax Credit only if the goods and services received is used for business purposes.
- Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
- For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
- One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
- Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
- If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
- The Input Tax should be paid through Electronic Credit/Cash ledger.
- All GST returns such as GST-1, 2,3, 6, and 7 needs to be filed
How Input Tax Works Under GST
Suppose Mr. A is a seller. He sells goods to Mr. B. The buyer Mr. B is now eligible to claim the purchase credit using his purchase invoices.
This is how it works:
- A uploads all his tax invoices details as issued in GSTR-1.
- The details uploaded by Mr. A is automatically populated or reflected in GSTR-2A. This same data will get reflected when Mr. B files the GSTR-2 returns which are nothing but the details of his purchase.
- The details of thesale are then accepted and acknowledged for by Mr. B, and subsequently, the purchase tax is credited to Mr. Bs Electronic Credit ‘ He can use this to adjust it later for future output tax liability and receive a refund.
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|
|IGST||IGST||CGST and then SGST/UTGST|
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.
Cost GST Total cost Deprecation charged on ITC available
500 50 550 550 nil
500 25 525 500 25
Under what situations one CAN NOT claim Input Tax Credit (ITC)?
|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.
|Taxable person is in the business of sale and purchase of new or second-hand motor vehicle 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
|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 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- Government made a law for the companies to provide cab facility for there female employees.
|4||Travel benefit to 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 own 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 service, 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 centre
Example- Company paying the gym fees for its employees
What are the documents and forms required to claim Input Tax Credit?
Each applicant will require the following documents to claim Input Tax Credit under GST:
- Supplier issued invoice for supplying the services and goods or both according to GST law.
- A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
- Bill of entry.
- A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules.
- An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law.
- A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.
The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request.
For taxes paid on goods and services or both due to any fraud or due to order for the demand raised, suppression of facts or wilful misstatement, Input Tax Credit cannot be claimed.
Since input credit will be available to the seller at each stage, the input tax credit is expected to bring down the overall taxes charged on the product at present. So, if input credit mechanism works efficiently, final consumers may see the cost reduction.
10 Important points regarding ITC
- For advance payment, the supplier is required to pay tax on such advance receipt but in case of the recipient, he can avail the ITC only when tax invoice is issued and goods/services are received.
- ITC cannot be availed on the basis of a photocopy of the valid document.
- SGST paid in one state cannot be utilized as credit for payment of SGST of another state.
- For payment of interest and penalty Input tax credit cannot be utilized in other words it should be paid using electronic cash ledger.
- For claiming ITC goods/ services must be actually received. Hence the goods or services received by the agent or the job worker will be assumed to be received by the recipient.
- On receipt of invoice by the recipient, invoice amount must be paid within 180 days from the date of invoice. If the recipient fails to pay so, the amount taken as credit will be reversed and output tax will be payable on such amount. Yet on the later date, if the recipient pays the invoice amount, he can again claim the credit.
- On filing the form GSTR-2 (inward supplies details) by the recipient, the credit claimed in the return will be credited to electronic credit ledger on the provisional basis. The recipient can file Form GSTR-3 and pay self-assessed tax by taking credit of input available in electronic credit ledger. After filling of form GSTR-3 by 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 in excess of 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.
- In case if goods (inputs and Capital goods both) has been received in installment or lot against a single invoice then input can be availed on the receipt of last installment or lot.
- GST paid under reverse charge can also be utilized as ITC.
- If goods or services purchased/received are used for both business and non-business purpose, then only part of ITC relating to goods/service used for business purpose will be allowed as a credit.Even in case of taxable and exempted goods/services, only the part relating to taxable goods/service will be allowed as a credit.
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