Input Tax Credit

Table of Contents

What Is Input Tax Credit (ITC)

One of the most important aspects of GST is the seamless flow of input credit across the supply chain (from the manufacture of goods to their consumption) and across the country. Input tax credit means that when you pay tax on output, you can deduct the tax you already paid on inputs and pay the difference. 

For example

When you buy a product or service from a registered dealer, you must pay sales taxes. You collect the tax when you sell. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales), and the balance of tax liability (tax on sales minus tax on purchase) is due to the government. This mechanism is known as input tax credit utilisation.

Assume you are a manufacturer: 

a. The output tax (FINAL PRODUCT) is Rs 450. 

b. The input tax (PURCHASES) is Rs 300. 

c. You can claim INPUT CREDIT of Rs 300 and only pay Rs 150 in taxes. 

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Who is eligible to receive ITC?

A person registered under GST can claim ITC only if he meets ALL of the prescribed conditions.

  • The dealer must have a valid tax invoice.
  • The aforementioned goods/services have been received
  • Tax returns have been submitted.
  • The supplier has paid the applicable tax to the government.
  • When goods are delivered in instalments, ITC can be claimed only on the last lot.
  • No ITC will be allowed if depreciation on a capital good’s tax component has been claimed.

A person registered under the GST composition scheme is not eligible to claim ITC.

GSTR-7

Reversal of Input Tax Credit

ITC can only be used for business-related goods and services. ITC cannot be claimed if they are used for non-business (personal) purposes or to make exempt supplies. Aside from these, there are a few other situations in which ITC will be reversed.

In the following circumstances, ITC will be reversed:

  1. Non-payment of invoices within 180 days– ITC will be reversed for invoices not paid within 180 days of issuance.
  2. Credit note issued by a seller to ISD– This is for ISD. If the seller issued a credit note to the HO, the ITC that was later reduced will be reversed.
  3. Inputs used for both business and non-business (personal) purposes – This is for businesses that use inputs for both business and non-business (personal) purposes. ITC applied to a portion of input goods/services used for personal purposes must be reversed proportionally.
  4. Capital goods are used partly for business and partly for exempted supplies or personal use – This is similar to the preceding but only applies to capital goods.
  5. The ITC reversed is less than the required amount– This is calculated after the annual return is submitted. If the total ITC on exempted/non-business inputs exceeds the ITC actually reversed during the year, the difference will be added to output liability. Interest will be charged.

 

Documents Required for Claiming Input Tax Credit

The following documents are required for ITC claims:

1. A bill issued by a supplier of goods or services.

 2. The supplier’s debit note issued to the recipient (if any) 

3. Entry Bill 

4. An invoice is issued in certain circumstances, such as a bill of supply instead of a tax invoice if the amount is less than Rs 200 or when the reverse charge is applicable under GST law. 

5. An invoice or credit note issued by an Input Service Distributor (ISD) in accordance with GST invoice rules. 

6. A bill of supply issued by the supplier of goods and/or services.


Special cases of ITC

ITC for Capital Goods:

However, ITC is not available for: i. capital goods used solely for the manufacture of exempted goods; and ii. capital goods used solely for non-business (personal) purposes.


ITC on Job Work:

A primary manufacturer may send goods to a job worker for further processing. A shoe manufacturer, for example, sends half-finished shoes (upper part) to workers who will fit the soles. In such a case, the principal manufacturer will be permitted to claim a tax credit for the purchase of such goods sent on job work.

When goods are sent to a job worker, ITC will be allowed in both cases:

  • from the principal’s workplace
  • directly from the supplier of such goods’ place of supply

However, in order to claim ITC, the goods must be returned to the principal within one year (3 years for capital goods).


ITC Provided by Input Service Distributor (ISD):

An input service distributor (ISD) is usually the registered person’s head office, but it can also be a branch office or registered office. ISD collects the input tax credit on all purchases and distributes it to all recipients (branches) under various headings such as CGST, SGST/UTGST, IGST, or cess.


ITC on Transfer of Business:

This is true in cases of business amalga.

Reversal of Input Tax Credit

ITC can only be used for business-related goods and services. ITC cannot be claimed if they are used for non-business (personal) purposes or to make exempt supplies. Aside from these, there are a few other situations in which ITC will be reversed.

In the following circumstances, ITC will be reversed:

Non-payment of invoices within 180 days– ITC will be reversed for invoices not paid within 180 days of issuance.
Credit note issued by a seller to ISD– This is for ISD. If the seller issued a credit note to the HO, the ITC that was later reduced will be reversed.
Inputs used for both business and non-business (personal) purposes – This is for businesses that use inputs for both business and non-business (personal) purposes. ITC applied to a portion of input goods/services used for personal purposes must be reversed proportionally.
Capital goods are used partly for business and partly for exempted supplies or personal use – This is similar to the preceding but only applies to capital goods.
The ITC reversed is less than the required amount- This is calculated after the annual return is submitted. If the total ITC on exempted/non-business inputs exceeds the ITC actually reversed during the year, the difference will be added to output liability. Interest will be charged.


What can be claimed as Input Tax Credit?

ITC can only be claimed for business purposes. ITC will not be available for goods or services used solely for: 

  • personal use; 
  • exempt supplies; or 
  • supplies for which ITC is expressly prohibited.


How to claim Input Tax Credit?

Regular taxpayers must include the amount of their ITC in their monthly GST returns on Form GSTR-3B. The summary figure of eligible ITC, ineligible ITC, and ITC reversed during the tax period is required in table 4. The following is the format for Table 4: A taxpayer can claim ITC in the GSTR-3B on a provisional basis up to 20% of the eligible ITC reported by suppliers in the auto-generated GSTR-2A return. As a result, before filing GSTR-3B, a taxpayer should double-check the GSTR-2A figure. Until October 9, 2019, a taxpayer could claim any amount of provisional ITC. However, the CBIC has announced that beginning on October 9, 2019, a taxpayer can only claim up to 20% of the eligible expenses.

However, the CBIC has announced that beginning on October 9, 2019, a taxpayer may claim no more than 20% of the eligible ITC available in the GSTR-2A as provisional ITC. This means that starting on October 9, 2019, the amount of ITC reported in the GSTR-3B will be the sum of the actual ITC in GSTR-2A and the provisional ITC, which will be 20% of the actual eligible ITC in GSTR-2A. As a result, matching the purchase register or expense ledger to the GSTR-2A becomes critical.

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