Understanding Input Tax Credit (ITC) under GST: A Comprehensive Guide

Input tax credit refers to payment of tax which can be reduced if you have already paid tax on inputs.

Input tax credit is vital feature of GST (Goods and Service Tax) regime. Input tax credit was introduce to eradicate the cascading effect of taxes to be paid to the CG and that which is levied by State Government. This has prominently helped in reduction of cost for doing business.

Input tax credit can be claim if the tax is paid on purchases and only if you are manufacturer, supplier, agent, e-commerce operator, aggregator or any of the persons mentioned, who are registered under goods and service tax.

What is input tax credit (ITC)?

ITC as a concept was initiated mainly for three below reasons: 

1. To levy tax on additional value only. 
2. To reduce eradicate cascading effect. 
3. It can be taken on GST incurred for input supply which can be used to make supply of payments of tax liability on output supply.

ITC can stated as, amount of Input tax paid that can be reduced by a businessman from the output tax liability. Out tax further can be referred as tax charges by seller on sales or supplies of goods and services. In nutshell, ITC can be used to set-off the GST liability on supply by registered person.

Types of taxes which can be claimed under ITC: 

1. Integrated GST (IGST) : This tax is applicable when there is interstate movement of goods 
2. Central GST (CGST): This tax is levied on intra state supplies of both goods and services by the central Government and collected by it for its coffers.
3. State GST (SGST) / Union Territory GST (UTGST): This tax is applicable for intra state movement of goods.
4. GST compensation Cess: This tax is applicable on notified goods.

Who is eligible for ITC under GST?

• Credit on Input tax paid can be availed only by the registered person.
• Credit will be allowed when input supply which are used or intended to be used is user d for furtherance of his business.
• W.r.t. SGST and CGST Act, a person who is taxable, registered as per GST Act and a who is paying ax due is eligible to claim ITC. 

Who can claim ITC? 

IT can be claimed by a person who is registered under GST Act and only if fulfills the conditions provided by the regulator. Some ITC are specifically restricted by the GST law.

1. Registration: One who wants to avail ITC should be registered under GST and must have valid GSTIN. 
2. Possession tax invoice: The dealer must possesses the tax invoice, debit note or other documents of tax payment.
3. Receipt of goods or services or both: Dealer must have received goods and services or both. Goods/services must not be used for personal consumption/exempted supplies. They must be used for business purpose 

–It includes goods received by the agent/third person under their direction before or during movement of goods i.e. if the goods are sold in transit.

1. Furnishing of returns: GST Returns must have been filed with purchases & sales details. 
2. Payment of tax: Applicable tax which is charged should be paid to the government by the supplier within 180 days of the invoice date. (Section 16(2) (c)-applicable from 1st July 2017.
3. Lot based eligibility: If the goods are received in installments ITC cannot be claimed in tranches and shall be claimed only when the last lot is received.
4. ITC will not be allowed if depreciation of goods has been claimed on tax component of a capital good

–The business has not claimed ITC on goods or services that are blocked from ITC under GST Act. Some examples of such goods or services are motor vehicles, food and beverages, outdoor catering, beauty services, health services, etc.

Therefore, to claim ITC on purchases of all the suppliers must be GST compliant as well. 

Credit of input tax can be availed only till earlier of last dates of 

– Filing of annual return 

– Actual date of filing annual return.

Also Read: Can you claim ITC on imported goods?

How to claim input tax credit under GST? 

To claim credit of Input tax, supplier must have paid tax which was collected during the span of the transaction. One should validate this before claiming ITC. One can claim refund when tax on sale is lower than that applicable on purchase.

Below table can be referred for GST return structure: 

Supplier can upload the invoices anytime during the month, so that same will be viewable by recipient anytime. 

Invoices which are populated in the annexure of recipient for inward supplies on timely basis, same is visible by the recipient in the “viewing facility” on the portal. Any action which needs to be taken against the invoice uploaded can be taken only after 10th of the next week under “viewing facility”

Recipient should thoroughly check and accept the invoices and no changes are be effected after accepting the same.

If the invoice is uploaded and the tax is not paid by the supplier there cannot be any reversal of ITC. In these cases, recovery shall be made from the supplier of goods/services.

Input tax credit can be claimed under GST if a person:

1. Checks the eligibility for claiming ITC 
2. Ensures that the tax invoice or debit note in form GSTR-1 (www.gst.gov.in) has been be filed by the supplier and the same appears in the person’s GSTR-2B form.
3. Files the return earlier of due date or filing the annual return.

Once the above points are satisfied, One should follow step as given below to claim ITC: 

1. Login to the GST portal with login credentials, enter details and access ITC form.
2. Select Prepare online to provide statements through the portal, select claim type, and enter suppliers GSTIN, invoice details and other details. 
3. Post filing in the details click on save, then submit and then proceed.

Also Read: How to Claim Input Tax Credit for E-invoices

Common ITC mistakes and how to avoid them.

In general, errors might be one amongst many. Below are some of the categorization:

• Understanding issues of what is eligible and not eligible,
• mistakes in reversal of proportionate credit,
• delayed availment of credit,
• Issues w.r.t. documentation or recording etc.
• suppliers fails to furnish the exact details of outward supplies in their FORM GSTR-1

Also Read: How to Avoid making Mistakes when Claiming ITC on Banking Transactions?

What are the conditions for claiming ITC?

1. Evidence documenting tax payment like tax invoice or debit note is available with the tax payer
2. Receipt of goods and services is available
3. Furnished returns 
4. Supplier has delivered goods to another person after being asked to do so by a registered person through a document indicating transfer  in title of goods 

Claim of ITC will not be available in respect of the following: 

• Motor vehicle and other conveyances, except if it is used for 
  • Further supply of goods or services
  • Transportation of goods
  • Imparting training on how to drive, navigate and fly them.

• Supply of following goods or services or both: 
  • Membership of club/health and fitness center
  • Travel benefits to employees
  • Foods, beverages, beauty treatment, cosmetic surgery, health services, outdoor catering.
  • Rent a cab, life insurance and health insurance (unless govt. Makes it mandatory to provide such facilities to the employees)
• Supplies which used for personal consumption
• If goods are lost/stolen or destroyed
• If goods are written off or disposed of by way of gift or free samples.
• Supply where tax is levied under consumption scheme 

One who wants to take credit of input tax lying in stock or contained in finished goods or semi-finished goods at the time of registration –

• One should apply within 30 days from the date when he is liable for registration and credit on such inputs immediately preceding the date from when he becomes liable to pay tax.
• In case of voluntary registration then the credit of such inputs held in stock immediately preceding the date of registration 

If a registered person ceases pay tax under composition scheme or supply which is exempt becomes taxable —

• One can take credit of tax paid on such inputs held in stock on the day immediately preceding the date from which he becomes liable to pay tax to the government
• If capital goods are supplied on which credit was taken-person shall pay an amount equal to such credit reduced by percentage points or transaction value of such supply whichever is higher.
• One can take credit for tax paid on capital goods mainly used for such goods or service if –
  • Credit is reduced to such percentage points prescribed in rules.
  • ITC can be availed within 1 year from the date of issue of tax invoice with respect to specific cases discussed above.
  • Credit which are unutilized can be transferred if scenarios of sale/amalgamation/ merger/ demerger/ lease/ transfer of the entity where there are exclusive provisions for transfer of liability.
  • If person opt for composition scheme or If the supply becomes exempt-
    • Amount equal to the credit of input held in stock or credit on capital goods reduced by the percentage point shall be debited either in the e-cash ledger or e-credit ledger.
    • Balance credit will lapse.

What happens if you don’t meet the conditions?

If there is difference in amounts mentioned while filing form (GSTR-1, GSTR-2A, GSTR-3B), the difference so reflected can be handled as below: 

1. the invoices on which ITC has been availed should be provided 
2. debit note issued by the supplier or such other tax paying documents shall be provided 
3. Proof of receipt of goods and services should be provided 
4. proof of payment being made towards the supply amount, along with tax payable thereon to the supplier to be provided
5. If the differential value is within the limit of INR 5 lakh: person claiming should produce a certificate about supplies have been made by them to the registered person and the tax on those supplies has been paid by the supplier in his return.
6. If the differential value exceeds the limit of INR 5 lakh: claimant shall produce a certificate from CA or CMA (ICWA) certifying the supplies in respect of the invoices have been made to the registered person by the supplier & the tax on such supplies has been paid in his return. The certificate produced by CA/CMA should possess registered UDIN no. Same needs to be verified by the government official.

If the supplier has filed form GSTR-1 as well as return in form GSTR-3B for a tax period, but he has declared the supplier with wrong GSTIN of the recipient: If the ITC is claimed in form GSTR, the concerned tax authority shall be intimated for disallowing ITC on the mentioned transaction

FAQs

• If I buy raw material from a supplier unregistered in GST, do I have to pay GST in RCM and can I avail ITC of the same?     

Yes, you have to pay GST via RCM. You can avail ITC of the GST so paid if you are eligible.     

• What is the time limit for taking input tax credit by a registered taxable person?

Due date of furnishing of the return for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of relevant annual return, whichever is earlier. 

• An assesse obtains new registration, voluntary registration, change of scheme from composition to regular scheme and from exempted goods/ services to taxable goods/services. It can avail credit on inputs lying in stock. What is the time limit for taking said credit?     

One year from the date of invoice.

• Eligibility of credit on capital goods in case of change of scheme from composition scheme to Regular Scheme. ?

Eligible immediately before the date from which he becomes liable to pay tax under the Regular Scheme. 

• What is the maximum time limit for availing ITC? 

Earliest of filing of Annual return or Due date of filing return u/s 39 for the month of September.

Shruti Jog

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