What are the Requirements for claiming ITC on Imported goods?

Introduction

Modern tax systems cannot function without the Input Tax Credit (ITC). It enables businesses to deduct the tax on inputs from the tax owed on outputs. However, implementing the GST input tax credit becomes more difficult because importing products entails cross-border transactions, customs charges, and international trade limitations.

In the context of interstate commerce, the IGST would be levied on both the import of goods and/or services into India, as they would be considered as supplies. Therefore, GST will be applied to imports and will be considered an interstate supply. Every import will be subject to integrated tax in addition to any other applicable customs charges since they are all considered inter-state supplies.

So, to make it easier for you, in this article, we’ll discuss the requirements for claiming input tax credits (ITC) on imported goods, including information on documents, compliance guidelines, and much more.

ITC requirements for imported goods in GST

Imported goods are subject to integrated taxation (IGST) and basic customs duty (BCD) because they are considered as interstate supplies. When collecting Input Tax Credits (ITC) on goods that are imported, some guidelines must be followed. First and foremost, the importer must possess a legitimate tax invoice or other authorised documentation.

• GST Registration

When the turnover of an importer reaches a certain level, they have to register for the GST scheme. A Goods and Services Tax Identification Number (GSTIN) is required before one can participate in import activities.

• Eligible Goods

ITC is only applicable to products and services utilised for commercial or business purposes. Credit is not available for use for non-business or personal purposes. Companies must confirm if the imported items are directly connected to their taxable supplies.

• Registered Person

For the purposes of GST, the importer must be a registered person. Unregistered companies are unable to collect ITC.

• Customs Duty and IGST

In addition to GST, Integrated Goods and Services Tax (IGST) and Customs Duty are also covered by ITC for imported items. But keep in mind that ITC on Customs Duty is only applicable to imports related to businesses.

To calculate IGST on imports, here is the procedure:

Let’s say imported goods into India have an assessable value of Rs. 1000. Ad-valorem basic customs duty is 10%. The integrated tax rate is 18%, the compensation cess is 15%, and the education cess is 3%.

Also Read: What are the Requirements for Claiming ITC on Free Gifts?

Documentation and paperwork for ITC claims on imports

Although the documentation may seem like a necessary evil, it is actually your greatest ally when it comes to importing ITC applications. The key documents are broken down as follows:

• Obtain the IEC (Import-Export Code)

Before beginning any importation, all importers in India are required to submit an online application to the regional joint Directorate General of Foreign Trade (DGFT) for an IEC number. A permanent account number (PAN) with lifetime validity, the Import Export Code (IEC) is necessary for sending shipments, clearing customs, and receiving or transferring money in foreign currencies.

• Bill of entry

For goods imported, think of the Bill of Entry as your passport. It’s a document that customs officials issue that has important information on goods, including the identity of the importer, description of the goods, quantity, value, and paid taxes. Having this document is essential to claiming ITC.

• Debit Note

The supplier of the products or services issues an invoice or debit note. And this debit note should be in accordance with the provisions of Section 34.

• Invoice

In accordance with the GST invoicing regulations, an invoice or credit note must be issued by the Input Service Distributor (ISD).

• Compliance with Import Licence

Make sure you have the required licences if your imported goods need a particular licence. ITC claims can be hindered by non-compliance with import restrictions, which may also have legal repercussions.

• Delivery Challan

A delivery challan is required when moving items from one location to another. You also need to keep the document of IGST paid on imports.

• Details of Capital Goods

Compile capital goods invoices, indicating the type, amount, and value of the products. If applicable, distribute the input tax credit over several tax periods.

Remember, you may not be permitted to claim an Input tax credit where demand has been verified due to fraud or any hidden facts. 

GST credit rules for imported items

GST credits function similarly to tax rewards. The GST (Goods and Services Tax) you paid on any items you import may be credited to you.

There are two types of credits in the case of imports:

Credit for Customs Duty: This is the levy you have to pay when you import goods. You can typically claim credit for it if it’s for your business.

Credit for Integrated Goods and Services Tax (IGST): Another type of GST that may be applied to imported goods. Once more, you are eligible to receive credit for it if it is for your business.

Other crucial points to think about are as follows:

•  Reverse Charge Mechanism or RCM

According to RCM, the recipient of the products or services, not the supplier, is liable for paying the taxes. Businesses that import services under RCM are required to account for GST while claiming Input Tax Credits (ITC).

• Time of Supply

If the importer receives the products before the end of the month in which the related tax invoice is recorded, then the importer may claim ITC in that month. Accurate ITC claims depend on transactions being recorded on time.

• Check your invoices

To claim your credits, you must have the appropriate paperwork. Check the details on your seller-provided invoices, such as what you purchased, how much you paid, and if GST was applied.

Meeting compliance standards for ITC on imports

Businesses should ensure compliance with GST requirements not just as a matter of legal need but also as a business strategy. If you do not follow the compliances strictly, you may face heavy penalties and financial harm to your business. Businesses can comply with the following requirements for ITC on imports:

• Frequent Audits

To make sure that ITC claims comply with GST laws, conduct routine internal audits. By being proactive, you may find inconsistencies and fix them before they create problems with compliance.

• Proper Classification of Products

A business faces significant risk when it classifies its products incorrectly or misleadingly, and this can significantly reduce its profitability because of higher penalties and recovery costs. So, you need to make sure that the classification of products is done properly to avoid any penalties.

• Timely filing of Returns

Importers must stick to the standard procedures for filing GST returns. Depending on business revenue, they must file quarterly or monthly GST filings. The returns include information about outgoing supplies, inward supplies, taxes paid, and input tax credits claimed. 

• Valuation of Imported Goods

For GST compliance, figuring out the value of goods imported is essential. When you have to determine the value of the goods imported, all the rules should be followed as per Customs Valuation Rules. For better valuation, you should understand the valuation concepts clearly and declare all the imported items accurately.

• Invest in Compliance Software

To automate your operations, think about implementing compliance software. This system offers a centralised platform for managing and tracking compliance needs, in addition to improving accuracy.

Ensuring accuracy in ITC requirements for imports

Accuracy is essential for obtaining financial advantages and maintaining compliance while claiming Input Tax Credit (ITC) on imported items. Check out the steps which will ensure accuracy in ITC requirements for imported items:

• Invoice reconciliation

Make sure to regularly reconcile your records and invoices. Look for any differences and take immediate action to resolve them. This process guarantees that the taxes you paid on imported items are appropriately reflected in your ITC claims.

• Document Cross-Verification

Check details by cross-referencing the tax invoice and the entry bill. Make sure the details line up and tell a narrative of the imported goods coherently. For your ITC requirements to remain accurate, you must complete this step carefully.

• Employee Training

Make an investment in your staff’s training. Make sure they understand the ITC claim process and the GST requirements. Staff members with knowledge help ensure that the regulations are correctly interpreted and applied.

• Communicating with Vendors

Make sure you and your foreign suppliers can communicate clearly. In particular, stress the significance of complete and precise tax invoicing. The possibility of mistakes in your ITC claims is reduced when you work together.

Long-term benefits of adhering to ITC

It is not only a question of compliance but also a thoughtful choice that will pay off in the long term for companies engaged in international trade to adhere to the rules for the Input Tax Credit (ITC).  Although complying with ITC regulations for imported items may appear difficult, there are substantial long-term advantages for businesses:

• Cost optimisation

Saving costs is among the most significant and long-term advantages of following ITC guidelines. Businesses can minimise their taxes by carefully claiming credits for the taxes they have paid on imported items. Over time, these savings mount up and significantly influence the company’s overall financial health.

• Making Strategic Decisions

Businesses can get a precise and transparent view of their financial health by committing to ITC compliance. The information gained from regular and precise ITC claims is an essential resource for making smart choices.

• Resource Allocation

Businesses can carefully spend finances, labour, and time, focusing on areas that drive growth and profitability. They can position themselves for long-term success by streamlining operations avoiding the consequences of non-compliance and accurately adhering to ITC.

• Improved Cash Flows

Better cash flow management is made possible by accurate ITC claims. Businesses make sure there is a consistent supply of working capital by deducting input tax payments from output tax liabilities. In the long run, this financial stability enables more seamless daily operations and strategic investments.

• Favourable Impact on Credit Rating

A business’s creditworthiness is frequently evaluated by creditors and financial institutions based on its compliance history and financial stability. A business’s credit rating is improved when it complies with ITC criteria. Over time, a positive cycle of financial stability is established by having a good credit rating, which makes it easier to obtain attractive terms, loans, and partnerships.

Also Read: The benefits of claiming ITC on Capital Goods

Conclusion

Finally, it should be noted that companies have a strategic obligation to learn and abide by the ITC rules for imported goods under the GST structure. It is about minimising expenses, ensuring accuracy in financial reporting, and laying the groundwork for long-term success. So, embrace the ITC game—it’s a win-win situation for your company!

Also Read: Can you claim ITC on imported goods?

FAQs

1. Who can apply for the Input tax credit on goods imported?

Those individuals who are registered under GST and purchase the goods or services for business purposes can claim the Input tax credit on goods imported. 

2.   Are we able to claim GST input while importing goods?

After the bill of entry (BoE) is issued, importers are only eligible to collect the IGST and cess paid on their goods. Taxpayers are given a framework by the GST Network (GSTN) to locate the appropriate bill of entry. 

3.   How does the ITC for goods imported get calculated?

The total product value plus the total customs charge paid on imported items is subject to GST. 

4. What are the consequences if you fail to follow the ITC requirements?

You must know that to prevent penalties and legal issues, ITC regulations must be followed. Companies who seek to claim Input Tax Credit (ITC) on imported items must follow GST legislation and meet the required conditions.

5. What are the documents required for claiming ITC on imported goods? 

For claiming ITC on imported goods one needs to submit the bill of entry, import invoice and other documents related to customs. 

6. Can you claim ITC on the full value of imported goods which includes customs duty? 

No, ITC is generally not allowed on the customs duty component. It can only be claimed on the (IGST) paid at the time of import. 

7. Where is the point of supply for imported goods?

For goods imported into India, the importer’s location will serve as the place of supply. 

8. To file an ITC claim for goods imported, what conditions must be satisfied?

The three primary requirements are ownership of the imported goods, payment of the import duty, and a current GST registration.

9. Can we claim ITC for capital goods?

ITC claim is possible for capital goods also. But the goods that are bought have been used for business purposes only. 

10. What does the advance authorization scheme mean for the import of goods?

A duty-free import of inputs that are physically integrated into an export product is permitted under the Advance Authorization Scheme.

Ateet Sharma Freelance Content Writer

Ateet Sharma is a B.com graduate and has done an MBA in Finance. He has worked majorly in the banking sector for more than 5 years. He has worked for retail banking as well as credit analysis and has worked for banking brands like Axis Bank, DHFL, Capital First, Bajaj Finance etc. He has written articles on varied topics in finance like banking, taxation, insurance, stock markets etc. Ateet likes to listen to music and read books in his free time.

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