What is the Input Tax Credit Under GST?

Input tax credit (ITC) is a crucial feature of Goods and Services Tax (GST). It encourages tax compliance, as businesses need to show tax paid on inputs to claim ITC. It also makes goods and services cheaper for the consumer, as the tax burden on businesses is reduced. Explore the concept and complexities of Input Tax Credit under GST in India. Understand how it works, its benefits, and how to claim it effectively. Discover its role in avoiding ‘tax on tax’ and ensuring a fair tax system.

Content 

• What is the Input Tax Credit?
• Necessary Requisites to Claim ITC
• Reversal of ITC
• Items on which ITC Is Not Allowed
• What is the Eligibility to Avail ITC under GST?
• How to Claim ITC under GST?
• What is the Time limit to claim an ITC under GST?

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What is the Input Tax Credit?

It is a credit manufacturers receive for paying input taxes. These are taxes on raw materials and services.

ITC is a mechanism to avoid tax cascading and allows a business to reduce its tax liability. The reduction is by the amount of tax paid on purchases. It applies in the case of business purchases. It ensures tax is only on the value added at each product’s production or distribution stage.

Consider this – 

You are a furniture manufacturer: 

• You buy raw materials (wood, nails, glue) for Rs. 1000, paying a GST of 10%, which is Rs. 100.
• You then sell the furniture to a retailer for Rs. 2000, charging a GST of 10%, which is Rs. 200.

Normally, the manufacturer would pay the government Rs. 200 GST. But with Input Tax Credit, the manufacturer can deduct the Rs. 100 GST that was paid on raw materials.

So, the manufacturer only needs to pay Rs. 100 (Rs. 200 – Rs. 100) to the government.

Necessary Requisites to Claim Input Tax Credit 

 The following requisites are mandatory for claiming an input tax credit under GST –

1. The business/individual must be registered under GST Law.
2. They must hold a tax invoice or debit note issued by the registered supplier reflecting the tax amount.
3. The business/individual must have received the goods or services.
4. Suppliers should have filed returns and paid those taxes to the government.
5. If goods are received in parts or instalments, you can claim the ITC receipt of the last lot or instalment.
6. No input tax credit is allowed if you include the ITC in the cost of capital goods and claim depreciation on such tax.
7. An input tax credit will not be allowed if not claimed within the prescribed time limit.

Reversal of Input Tax Credit (ITC)

The input tax credit can be reversed under specific conditions, which include –

• Failure to pay the supplier within 180 days from the invoice date.
• If a business sells goods exempt from GST, the ITC claim on inputs for producing those goods must be reversed.
• Goods and services used for producing or supplying exempted goods or services.
• If a business switches from regular GST to the Composition Scheme.
• If the input service distributor issues the credit note.
• Supplies that are not eligible under section 17(5) of the Act.
• If the goods on which ITC was claimed are lost, stolen, or destroyed.
• If the goods are given away as gifts or freebies.
• The transition from registered regular dealer to composite dealer
• If goods or services purchased for business are used for personal purposes.

Items on which ITC Is Not Allowed

• Motor Vehicles include goods transport agencies, vessels and aircraft for transporting persons with a seating capacity of less than or equal to 13 persons (including the driver).
• Food and Beverages, outdoor catering
• Beauty treatment, health services, cosmetic surgery  
• Club, health, and fitness center membership.
• Travel benefits for employees on vacation 
• Goods lost, stolen, destroyed, or given as gifts
•  The expenditure spent on Corporate Social Responsibility (CSR) initiatives by corporates.
• Rent-a-cab services, life insurance, health insurance
• Constructing an immovable property on own account

Please note that this is not an exhaustive list. There are other goods and services on which ITC is not allowed as per the CGST Act.

What is the Eligibility to Avail ITC under GST?

A taxable person becomes eligible to avail of ITC under GST under the following conditions –

Upon applying for registration voluntarily

If you apply for registration under GST on becoming liable to register voluntarily, you can avail of ITC the day before the date you become liable to pay tax. Remember that you must apply for registration within 30 days from the date you were liable to register.

Upon shifting from a composition scheme to a regular dealership

If you registered under the composition scheme, but your aggregate turnover surpasses Rs. 50 Lakh, you must leave the composition scheme and become a regular dealer. This way, you can avail ITC on semi-finished or finished goods in stock and capital goods the day before you become liable to pay tax.  

Related Read – What is Credit Default Swap (CDS)?

Upon Paying the GST 

If you have paid GST on the supply and the tax amount has been credited to the government, you can take advantage of ITC.

If You Possess the Tax Invoice

To be eligible for ITC, the person must possess a tax invoice or debit note issued by a registered supplier.

Upon Filing the GST Returns

Make sure you have filled out the required GST returns.

Payment to Supplier

If the recipient has paid the supplier for the supplies received within 180 days from the date of issue of the invoice.

Receipt of Goods or Services

When goods are received in lots or instalments, one becomes eligible for ITC. They would need to reproduce the receipt of the last lot or instalment when demanded.

When the sale/merger/demerger/amalgamation/lease/transfer of the business occurs

If there is a specific provision for transferring liabilities, one can transfer the unutilized ITC to the sold, merged, demerged, amalgamated, leased, or transferred business.

How to Claim ITC under GST?

Claiming Input Tax Credit under the GST system in India involves several steps:

1. GST Registration: As mentioned above, you must be a registered taxpayer under GST and have a valid GST Identification Number (GSTIN).
2. Possess Valid Documents: You should have valid tax invoices, debit notes, or other specified documents.
3. Received Goods or Services: You must have received the goods or services. If the goods are received in lots or instalments, you can only claim ITC if the last lot or instalment is received.
4. Tax Paid to Government: The supplier should have paid the tax charged to the government.
5. GST Returns: File your GST returns. You should furnish the details of purchases and sales in GSTR-1 and GSTR-2 through the GST portal.
6. Claim ITC in GSTR-3B: You can claim ITC while filing the monthly return GSTR-3B. The amount of ITC claimed gets deducted from your total GST liability.
7. Payment to Supplier: Ensure that payment to the supplier is made within 180 days from the date of issue of the invoice. The ITC claimed it would be added to your output tax liability if not.

What is the Time Limit to Claim an ITC?

In India, the time limit to claim an ITC is defined by the Central Goods and Services Tax (CGST) Act. The deadline to claim ITC is –

1. The due date of filing the GST return for September following the end of the financial year in which the invoice or debit note was issued.
2. The date of filing the relevant annual return.

For example – if the invoice was issued in the financial year 2022-23, the ITC can be claimed until the due date for filing the GST return for September 2023 or until the date of filing the annual return for 2022-23, whichever is earlier. 

Note that if the ITC is not claimed within this time limit, the unclaimed ITC will lapse.