One of the objectives of GST was to eradicate cascading effect of taxes which existed under excise, VAT and service tax.
Under GST Input Tax Credit can be claimed irrespective of place of supplier, thus making accessibility for sales and purchase of goods easier.
Let us now understand the concept of Input Tax Credit in detail -
What is Input Tax Credit?
Input tax credit (ITC) is the tax paid by the buyer on purchase of goods or services.
Such tax which is paid at the purchase when reduced from liability payable on outward supplies is known as input tax credit.
In other words, input tax credit is tax reduced from output tax payable on account of sales.
Lets Understand With the help of Example
Mr. A purchased goods worth Rs. 18,000 on which GST @ 18% was Rs. 3240.
He sold goods worth Rs. 22,000. GST payable @ 18% is Rs. 3960.
Let us calculate and understand net GST payable and input GST credit.
Outward GST payable | Rs. 3960 |
Less- GST paid on purchases | Rs. 3240 |
Thus, net GST payable through cash Rs. 720
From above, we understand that Rs 3,240 reduced is input tax credit availed that had been paid on purchases.
Basic Requisites / Conditions for Claiming Input Tax Credit (ITC)
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The following requisites are mandatory for claiming input tax credit under GST
- One must be registered under GST Law
- A tax invoice or debit note issued by the registered supplier showing the tax amount
- The registered person should have received the respective goods or services or both;
- Supplier should have filed returns and paid such tax thereon to the government
- Where goods are received in parts or in installments, ITC maybe claimed on receipt of last lot or installment.
- Where input tax credit is included in the cost of capital goods and depreciation on such tax is claimed, no input tax credit is allowed.
- Input tax credit will not be allowed if the same has not been claimed within the prescribed time limit.
Documents on which Input Tax Credit may be claimed:
A registered dealer can claim input tax credit on the basis of following documents –
- A tax invoice issued by registered supplier
- A debit note issued in respect of earlier issued tax invoice by the registered supplier.
- An invoice issued by the recipient of goods or services who has paid tax under reverse charge mechanism
- A bill of entry or similar document in case of imports.
- An invoice or credit note issued by an Input Service Distributor.
ITC Claim Not Valid If Seller Fails To Pays GST To Government
The interplay between buyer and seller in a B2B transaction is cemented on the common portal through the GSTR-1 form, a crucial step to ensure transparent documentation. This platform allows the buyer to verify the seller's proper registration of the transaction. Regrettably, if the seller omits to record the transaction, the buyer's access to claiming ITC evaporates.
While GSTR-1 form submission serves as a foundational element, it merely constitutes one facet of the process. According to Section 16(2)(c), even if the transaction is accurately reported, the buyer's ITC claim hinges upon the seller's subsequent fulfillment of tax payment and GSTR-3B filing. If the seller fails to meet their tax obligations, the burden of additional tax payment unfairly shifts to the buyer.
Relevant Provisions for Availing ITC
Section 16(2)(c) of the CGST Act forms the bedrock of ITC eligibility, proclaiming that no registered person can claim input tax credit unless tax has been paid to the Government, either through cash or ITC utilization. Section 41(2) delineates repercussions for credit availed when the supplier fails to pay tax. The registered person must reverse the credit and settle any accrued interest.
The proviso to section 41(2) accommodates scenarios where the supplier eventually pays the outstanding tax. It permits the previously reversed credit to be re-availed. This safeguards the principle of tax neutrality, sustaining the efficiency of the ITC mechanism.
Section 41 ensures the fluidity of the ITC mechanism by outlining the framework for credit availing, reversal, and re-availing. It incentivizes timely and accurate tax payments by both suppliers and recipients.
Reversal of Input tax Credit (ITC)
Input tax credit may be reversed under certain circumstances as mentioned below –
- Failure to pay supplier within 180 days from the date of invoice.
- Goods and services whether inputs or capital goods used for personal purpose.
- Goods and services utilized for producing or supplying exempted goods or services.
- Sale of capital goods or plant and machinery on which input tax credit was claimed.
- Credit note issued by input service distributor.
- Supplies ineligible under section 17(5) of the Act.
- Transition from registered regular dealer to composite dealer
Where input tax credit (ITC) is reversed,
- The amount reversed may be added to output tax liability in the month in which it is reversed,
- Interest shall be paid from the date of availing credit till the date when the amount is reversed and paid
- No time limit shall be applicable for reclaiming the reversed credit.
How To Avail Credit Where Tax Has Been Paid Under
Reverse Charge Mechanism (RCM)
Where tax has been paid under reverse charge basis, input tax credit may be availed in the same month in which the payment is made, provided the following condition is satisfied –
(1) Liability has been discharged through cash
(2) Goods or service has been used for business purpose
(3) Self-invoicing is done on such purchases as no tax invoice can be issued by unregistered supplier
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Time limit for claiming Input Tax Credit (ITC)
Input tax credit can be claimed against an invoice/ debit note or credit note before the end of the following dates, whichever is earlier –
- Due date of GST return filing for the month of September of the next financial year
- Date of filing annual return for that financial year. For the FY 17-18, period to be claimed ITC was extended to March 2019.
However, if no credit has been claimed till filing return of March 2019, any such credit will lapse and cannot be claimed even through GSTR 9 annual return.
Thus, it can be understood that no Input tax credit can be claimed through GSTR 9 annual return if the same is not claimed through other GST returns.
To learn more on GSTR 9C Audit format, visit our dedicated blog
Special Circumstances in which ITC may be claimed
As per Section 18 of the CGST Act, Input Tax Credit may be claimed in certain special circumstances –
Availability of Input Tax Credit in case of compulsory registration.
Availability of Input Tax Credit in case of voluntary registration
Availability of Input Tax Credit when the registered person ceases to be applicable for GST composition scheme.
Availability of input tax credit in case exempted supplies become taxable
Availability of input tax credit in case of change in constitution
Ineligible Input tax credit or items where ITC is not allowed
Purchase of motor vehicles or conveyances. However, there are certain exceptions to it.
Any expense including insurance of motor vehicles or conveyances mentioned above.
ITC on food, beverages, outdoor catering services, beauty treatment, health services, cosmetic and plastic surgery
Sale of membership of health and fitness centre, clubs
ITC on rent a cab, life insurance, health insurance
Travel benefits extended to employees
ITC on works contract services availed for construction of immovable property, including goods and services used for construction for immovable property (except plant and machinery).
ITC on purchases by registered person opting for composition scheme.
Goods or services used for personal consumption
ITC on goods stolen, lost, destroyed, written off or given as free samples.
ITC on tax paid due fraud cases.
Read More about Ineligible ITC
Important Note:
Taxpayers must note that CBIC has cleared the confusion on whether GST Input Tax Credit should be claimed based on GSTR-2B or GSTR-2A?
CBIC has re-iterated that GSTR2B statement will be the definitive and authoritative source to identify your eligible ITC for the month.
Input Tax Credit Set-Off Rules
From 1st July 2019, GSTN portal has been updated with new system of ITC utilisation. ITC can be utilised in the manner described below.
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- IGST credit should be fully utilised first.
- In case of CGST liability, CGST credit is to utilised first and then IGST credit. However, one must take into consideration that no IGST credit is pending
- In case of SGST liability, SGST credit is to utilised first and then IGST credit. However, one must take into consideration that no IGST credit is pending
- CGST credit cannot be utilised against setting off SGST liability and vice versa, SGST credit cannot be utilised to set off CGST liability.
- The main aim while setting off input tax credit against tax liability is to have minimum tax pay-out after complying with all provisions of the act.
Time limit for claiming ITC under GST
GSTIN has specified a time-limit to claim the Input Tax Credit.
As per Section 16(4) of the CGST Act 2017, taxpayers can claim any pending ITCs for any particular month, till the September of the subsequent year or while filing the annual return GSTR-9 for the financial year in which the Input Tax Credit has been availed.
Any pending ITC post this period will collapse & you will not be allowed to utilize it in any way to release any tax liabilities.
However, it is recommended to claim the ITC in real-time that is to claim ITC on a monthly basis via form GSTR 2B Reconciliation & GSTR 3B filing.
The ITC claiming time limit must be kept in mind by the accountants especially while dealing with complex transactions such as Imports & SEZ transactions.
Refund of Input tax credit under GST
Refund of GST Input Tax Credit comes in three forms, that is there are three cases under which a taxpayer can claim the refund of the ITC in their electronic credit/cash ledger
Following are the three cases under which taxpayers can claim the refund of ITC-
- 1Refund of unutilized Input Tax Credit (ITC) on account of Exports without the payment of integrated tax.
- 2Refund of unutilized Input Tax Credit (ITC) on account of goods or services supplied to SEZ Unit/ SEZ Developers without the payment of integrated taxes.
- 3Refund of unutilized ITC on account of accumulation due to the inverted tax structure, where the input tax is more than outward tax liabilities.
Input tax credit rules under GST
There are a few rules & conditions that taxpayers need to keep in mind while claiming ITC under GST.
We have simplified them & broken them down for you in a list below-
180 Days Rule
The buyer of the goods who is claiming the ITC must make the complete payment to the supplier within 180 days from the date of supply in order to claim ITC.
If the buyer fails to do so, then their credit availed will be added to their outward tax liability.
Time Limit of claiming ITC
ITC can be claimed by the taxpayer EITHER till the GSTR 1 return filing of September of the subsequent year OR in the filing of form GSTR 9 annual return.
Possession of Documents
The taxpayer who is willing to take ITC must possess the invoices & other supporting documents with him, such as Debit & Credit Notes under GST.
Receiving the Goods
The receiver of the goods & services must have received the same within 180 days from the date of the invoice.
ITC on Capital Goods
You cannot claim ITC on Capital Goods if you have already claimed depreciation on the same.
You can opt for either of the two but not both.
Goods Received in Installments
In case you are receiving the goods in lots or installments, then you will only be eligible for ITC when the last & final instalment is received by you.
ITC on Debit Notes
Customers can claim ITC based on Debit Notes created against an Invoice.
ITC, in case of Credit Note Generation
Using a Credit Note, the supplier can reduce their tax liabilities.
In this case, the recipient will have to reverse the ITC that they have claimed as Credit Notes nullify the transactions.
ITC on Import of Goods
While claiming ITC on imports, you must furnish- The bill of entry & The IGST payment challan.
Deposition of Taxes to the government
You must ensure that the GST that you have paid to the supplier reaches to the Government via GST returns.
If the tax doesn't reach the Government, you may not be able to claim full ITC of the same
Common Credit of ITC under GST
Common Credits can only be claimed in the following 2 cases-
- Effecting exempted and taxable supplies
- Business and non-business related activities
Input Tax credit on Capital Goods
There are four types of Capital Goods in businesses & here is how ITC works on them-
Capital Goods only for Personal Use: No ITC available
Capital Goods only for Exempted Sales: No ITC available
Capital Goods only for Normal Taxable Sales- ITC available per usual
Capital Goods for both personal/ exempted AND for Normal Sales:
Calculate proportionate ITC depending on the ratio in which the goods are used for personal & business purposes.
Note-
ITC can only be claimed on Capital Goods, when depreciation has not been claimed on them. Meaning you can either claim ITC or depreciation on Capital Goods.
To learn more on ITC on Capital Goods visit the dedicated blog in the link.
Input tax credit with example
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Here is an Example of how Input Tax Credit Mechanism under GST works-
Mr. Pushkar buys processed & dyed silk material worth INR 50,000 at a GST rate of 5% (Total cost paid- 52500 including GST) for his Silk business.
Since Mr. Pushkar is using the material for his business, he can claim the credit of INR 2500 by mentioning the same in their GSTR 3B Return and adjust the same with his outward tax liability & reduce it.
He then sells his finished goods for INR 80,000 at a tax rate of 12%, his total tax liability for the same tax period becomes INR 9600.
Now since he already paid INR 2500 as input tax, he can utilize his credit & reduce the outward tax amount while paying the tax liability at the time of filing his GSTR-3B for that tax period.
Meaning he will only have to pay an adjusted amount of INR 7100 as his outward tax liability.
Working- Now, the major question here is how does ITC work while filing the GST returns?
Here is a simple explanation- First, Mr. Pushkar’s supplier will file their GSTR-1 & declare the details of the sale he made to Mr. Pushkar in the same.
The details filed by the supplier in their GSTR-1 will reflect in Mr. Pushkar's GSTR-2A as well as GSTR-2 for that tax period.
Mr. Pushkar will then file their GSTR-3B using their GSTR-2A & GSTR-2 where he will calculate his actual tax liability, his input tax credits as per GSTR-2A, & then the final adjusted tax liability payable.
Reversal of Input Tax Credit under GST
Payment the supplier within 180 days from issue of invoice
Inputs and capital goods must not be used for personal purposes
Inputs and capital goods must not be used for providing exempt supplies
Credit Notes issued by seller to ISD (Input service distributor)
When the reversed ITC is less than required
This reversed ITC needs to be furnished in the recipients GSTR-2. Additionally, the reversed ITC will add up to the total outward data.
Note- ITC can be declared in Table 11(2) of Form GSTR-2
Note- the recipient will have to pay these reverse charges & their taxes for the ITC availed earlier
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