All About Input Tax Credit (ITC) Under GST

One of the most significant tax reforms in India is the Goods and Services Tax or GST. This destination-based tax has reduced the cascading effect of taxes and provided us with a tax system driven by technology.

A key talking point in the GST is the input tax credit or ITC. Many businessmen are aware of it but don’t understand it completely. Some know how the VAT input credit worked but can’t differentiate it from the input tax credit under GST.

Let’s begin by understanding what exactly is the input tax credit under the GST regime.

What is Input Tax Credit?

In simple words, input tax credit refers to the measures of reducing the taxes paid on inputs from those to be paid on outputs. Input tax is the GST charged to a person who has been supplied with goods or services. So if you’re a taxable person, you can reduce the input tax you’ve already paid at the time of paying output tax.

For instance, A is a manufacturer who has paid an input tax of Rs 400. His tax payable on output is 600. In such a scenario, he can claim 400 as an input tax credit and deposit the difference between the two (200) in taxes.

Although the concept isn’t new and existed pre-GST as well, the scope of ITC has widened. However, it would only be available to individuals covered under the GST Act for taxes paid by you on your purchases.

So if you’re a supplier, manufacturer, e-commerce operator, agent or aggregator registered under the GST Act, you can easily claim the input tax credit. You can claim the input tax credit under the following GST laws: IGST, CGST, SGST, UTGST and GST compensation cess.

Let’s move on to claiming ITC under GST.

Conditions for claiming an Input tax credit under GST

Here are a few conditions you would require to meet to claim ITC under GST.

1. Tax Invoice or Debit note

It’s vital to have a tax invoice or debit note issued by the registered dealer. In case the goods are received in instalments, you would be able to avail credit only on the tax invoice of the last instalment.

2. You should be the receiver of the services or goods

The person who is claiming an input tax credit under GST must also be the receiver of said goods and services.

3. Your supplier must have filed GST returns

The reason GST is so revolutionary is due to this condition. The input tax credit, under GST, can only be availed if your supplier has filed GST returns or the tax he collected from you. So before claiming an input tax credit, ensure that this condition is met.

4. Tax paid to the government by the supplier

Your supplier must deposit the tax charged on your purchases to the government. It could be in cash or using input tax credit claims.

So before claiming an input tax credit under GST, ensure that your suppliers are GST compliant and the above conditions get fulfilled.

5. Payment via electronic credit/cash ledger

The input tax credit that you’re claiming must get paid using an electronic credit/cash ledger.

6. ITC must be claimed within the prescribed time limit

If the input tax credit isn’t claimed within the prescribed time limit, it will not be allowed.

How to avail ITC under GST?

There are three types of taxes under GST, as mentioned above. IGST is charged for the intra-state supply of services and goods while SGST/UTGST and CGST get charged for the inter-state supply of services and goods. The input tax credit can be allowed in the following manner while making payments for these taxes.

1. CGST

If there’s a liability under CGST, CGST credit must get utilised first. If there’s any balance, it should get used for IGST.

2. IGST

If there’s a liability under IGST, IGST credit should get utilised first. Afterwards, CGST credit can be used and then SGST/UTGST.

3. SGST/UTGST

If there’s a liability under SGST, SGST credit should get utilised first, and then IGST can be used.

Note

• SGST credit cannot get utilised against the liability of CGST and vice versa.
• While setting off input tax credit against tax liability, always try to have minimum tax payment while complying with all the GST provisions.

Documents for claiming the input tax credit

An individual who is registered under the GST Act can claim ITC using the following documents:

1. A tax invoice

You can avail ITC using a tax invoice. However, the invoice must get issued by the registered supplier.

2. A bill of entry

In the case of imports, a bill of entry can be used to claim ITC.

3. Credit note

A credit note or invoice supplied by an input service distributor is another document that can get used.

4. Debit note

If the registered supplier issues a debit note for an older tax invoice, it can work as a document for claiming the input tax credit.

5. Invoice by the recipient of services or goods

If the recipient has paid tax under reverse charge mechanism and issues an invoice, that invoice would work as a document for claiming ITC.

Can ITC get reversed?

The input tax credit may get reversed in the following circumstances:

1. If the goods and services are used for personal purposes.

2. If the input service distributor issues the credit note.

3. If the supplier doesn’t receive his payment within 180 days from the date of invoice.

4. If the services or goods get utilised for supplying or producing services or goods that are exempted.

5. If the plant and machinery or capital goods on which ITC was claimed get sold.

6. If a registered regular dealer transitions to composite dealing.

Note

The amount that gets reversed typically gets added to the output tax liability. It gets added in the same month that it is reversed.

What is the tenure to claim ITC?

ITC can be claimed before the end of the following date, whichever is earlier.

1. Due date for return in the month of September in the next financial year.

2. Due date of filing return for the respective financial year.

Note

An individual who is registered can claim ITC up to 1 year from the date of invoice. In the case of capital goods, the tenure is up to 5 years.

Are there any exceptional circumstances in which ITC may be claimed?

There are some particular circumstances under section 18 of the CGST Act in which ITC can be claimed. They are as follows:

1. If ITC is available in case of voluntary registration.

2. If ITC is available in case of compulsory registration.

3. If ITC is available in case exempted supplies become taxable.

4. If ITC is available in case of an alternation in the constitution.

5. If ITC is available in case a person ceases to be applicable for composition scheme.

Refund of ITC under GST

1. A registered person can ask for a refund of unutilised ITC in the event of exports without the payment of integrated tax.

2. Refunds of unutilised ITC is also available in case of goods and services that were supplied to the SEZ unit without paying for integrated taxes.

3. Lastly, the refund of unutilised ITC can also take place, if due to the inverted tax structure the input tax exceeds the output tax.

Some items on which ITC isn’t allowed:

1. Life insurance and health insurance

2. Renting a cab

3. Purchase of conveyances and motor vehicles. However, there are a few exceptions.

4. Travel benefits for employees.

5. Food, Beverages, Outdoor catering

6. Health services

7. Beauty treatments

8. Tax paid on fraudulent cases.

9. Lost, stolen, or destroyed goods

10. Sale of fitness club memberships

Conclusion

The input tax credit under GST allows you to reduce the taxes already paid on purchases, and it’s easy to claim. If they know the basic rules, you would have no trouble in availing ITC.

We have included every significant knowledge around ITC under GST in this article, and they would come in handy for both professionals and beginners.

Also read:

1) Why Do We Pay Income Tax in India? Importance, Applicability & more
2) Provisions for Income Taxes in India Applicable for Salaried People.
3) How To Pay Income Tax Online? Step-By-Step Guide.
4) The USA vs India: Taxation System