What is Input Tax Credit?

Input Tax Credit (ITC) simply means the tax already paid by a person at the time of purchase of some goods or services which is available as a deduction from tax payable.

Say for when you buy a product or hire any service from a registered dealer, you pay taxes on the purchase, and on selling, you collect the tax. You calibrate the taxes paid at the time of purchase with the amount of output tax (tax on sales) and the balance liability of tax (tax on sales minus tax on purchase) that has to be paid to the government. This mechanism is called the utilization of ITC.

Let’s take an example-  You as a trader purchased goods of Rs. 100 and paid tax of Rs 10 on it. Now the same goods are sold by you at Rs. 150 and a tax of Rs. 15 is collected from the buyer. Now you have to pay Rs.15 to the government for that good but you had already paid Rs.10, so this Rs. 10 is your ITC and it will be allowed as a deduction from tax payable and you have to pay net Rs. 5 as tax. You have to report the same while going for GST return filing. Although availing of ITC is subject to certain conditions which are covered below.

Necessary Conditions For claiming ITC

Only registered people would be able to claim the benefit of the Input Tax Credit of GST. Moreover, Input Tax Credit is allowed to a person only if the following conditions are fulfilled

He is in control of a tax invoice or debit note issued by a supplier registered under GST

He has received the goods and/or services

The supplier should be paid the cost of goods/services and the applicable tax on it within 180 days from the date when the invoice was issued by him. Non-compliance with this provision will lead to enhancing the output tax liability. However, after the amount is paid, the recipient will be entitled to avail of the credit. Even if the recipient has made a partial payment, partial credit will be allowed.

The tax charged in respect of such supply has been actually paid to the account of the appropriate Government

He got his GST return filing done.

ITC will not be allowed after any of the following

• Due date of the return for the month of September of next financial year
• Annual return filed for the relevant year (Filing date, not due date)

 

Individuals who obtain voluntary registration are entitled to take the ITC of input tax on inputs in stock, inputs in semi-finished goods and finished goods in stock, held on the day immediately preceding the date of registration.

The ITC can be claimed only on purchases made for selling taxable or zero-rated goods or services. It is not allowed for purchases made for exempted supplies.

In cases where goods against an invoice are received in lots or instalments, the registered taxable individual shall be entitled to take credit upon receipt of the last lot or instalment.

The input tax credit of the GST component of capital goods is not allowed if the person has claimed depreciation in the income tax act for the GST component. In other words, a person can either take an input tax credit of GST on capital goods or claim depreciation on tax components.

Documents required to claim ITC.

➤ Invoice issued by the supplier of goods or services or both.

➤ Invoice issued by Recipient along with proof of payment of Tax.

➤ A Debit note was issued by the supplier.

➤ Bill of entry or similar document prescribed under the Customs Act.

➤ Revised Invoice.

➤ Document issued by the Input Service Distributor.

How to claim ITC?

All regular taxpayers must report the amount of input tax credit(ITC) in their monthly GST return filing form GSTR-3B. The table 4 requires the summary figure of eligible ITC, Ineligible ITC and ITC reversed during the tax period.

A taxpayer can claim ITC on a provisional basis in Gst return filing form GSTR-3B to an extent of 20% of the eligible ITC reported by suppliers in the auto-generated GST return filing form GSTR-2A. Hence, a taxpayer should double-check the GSTR-2A figure before proceeding to file GSTR-3B GST return filing. Earlier, A taxpayer could have claimed any amount of provisional ITC but, now a taxpayer can only claim not more than 20% of the eligible ITC available in the GSTR-2A as provisional ITC. This means that the amount of ITC reported in the GST return filing form GSTR-3B will be the total of the actual ITC in GSTR-2A and the provisional ITC being 20% of the actual eligible ITC in the GSTR-2A. Hence, matching of the purchase register or expense ledger with the GSTR-2A becomes very important 

Ineligibility to claim ITC

ITC cannot be claimed in the following cases:

➤ Purchase of capital goods used for non-business purposes.

➤ Composition dealers

➤ Purchase of capital goods used for manufacturing exempted goods

➤ Blocked credits [Section17 (5)]

It should be noted that if taxpayers have availed and used ineligible ITC, the interest of 18% has to be paid. Interest need not be paid if ineligible ITC is only availed, without being used.

Cessation

Through claiming ITC in GST return filing, you can reduce the tax you have already paid on inputs and pay the balance amount. For availing of this benefit, there is a proper set of guidelines. It ensures the accountability of the suppliers to pay the required tax also prevents the overall increase in the price.

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