Conditions To Claim Input Tax Credit (ITC) Under GST
Conditions To Claim Input Tax Credit (ITC) Under GST

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Date: 19 Sep 2022


Who can claim ITC in India?

Input Tax Credit is one of the significant features of GST. It is applied to every transaction conducted under GST. Understanding how to claim an input tax credit, when to claim one, what cannot be claimed, etc., is crucial for a registered person. Incorrect input tax credit claims may result in fines, interest, and taxes.

What is Input Tax Credit?

The tax a person already paid when purchasing goods or services is eligible as a deduction from the tax due from the sale of goods and services is referred to as an input tax credit.

For instance, a merchant might buy goods for Rs. 100 and pay 10% GST, taking the total purchase price up to Rs. 110. The dealer then sells the goods for Rs. 150 while charging the customer Rs. 15 as GST. Hence, the dealer has received Rs. 165 for this transaction. The total GST due on this product is Rs. 15. However, since the merchant had already paid Rs. 10 as GST while purchasing the goods, he is eligible to claim Rs. 10 as Input Tax Credit. Therefore, the merchant is now liable to pay only Rs. 5 as further GST on this product (Rs. 15 total GST due - Rs. 10 GST already paid).

Conditions required to claim ITC

To claim ITC, a few conditions are laid out by section 16 of the CGST Act. These conditions are as follows:

  • Only those with a GST registration and who have submitted their GSTR 2 returns may claim the input tax credit.

  • The tax invoice or debit note issued by the input or input service provider must be in the dealer's possession.

  • Receiving the products as mentioned above, services or both are required.

  • The supplier has made the GST payment due to the government for this supply.

  • The ITC can only be applied when the final batch of goods is received and purchased in instalments.

  • If depreciation is claimed on the tax of a capital good, no input tax credit is permitted. 

  • The registered taxpayer should pay the supplier within 180 days from the date of the invoice. 

Cases Under Which ITC Cannot be Claimed

The following commodities or services are not eligible for the input tax credit under GST:

  • Motor vehicles, unless given in the course of business or used to provide taxable services like the transportation of passengers; the transportation of products; providing instruction in operating, navigating, and flying such vehicles; Additional supplies of similar vehicles or modes of transportation.

  • A registered taxable person may not use an inward supply of goods or services of a specific category to make an outward taxable supply of the same type of service, except for outdoor catering, cosmetic and plastic surgery, and health services.

  • Club, health, and fitness centre membership.

  • Renting a car, life insurance, and health insurance, unless the provision of such services by an employer is mandated by law.

  • Employees on vacation receive travel benefits such as leave or home travel discounts.

  • Other than plant and machinery, the primary received goods and services for building the real property, unless they were input services for providing work contract services.

  • Except for machinery, goods, and services that a taxable person receives for building an immovable property on his account, even if they are utilised to develop their company.

  • Goods or services that have received tax payments under the composition program.

  • Goods or services purchased for personal use.

  • Goods that were given away as gifts or samples or that were disposed of.

  • Tax paid following the discovery of fraud, willful misrepresentation, or suppression.

  • Tax is paid for releasing commodities that have been impounded or confiscated.

  • Releasing things that were seized after paying tax.

Documents Required for Claiming ITC

  • An invoice sent by the seller of the goods or services

  • An invoice created by the company that received the products and services from an unlicensed dealer. A reverse charge is applied to such supplies.

  • A debit note for the tax charged issued by the seller is less than the tax due on that particular supply.

  • An integrated import tax must also be supported by a bill of entry or other equivalent paperwork.

  • An input service distributor generates a bill or credit note following GST regulations.

  • A supply invoice from a dealer who has chosen a composition scheme.

How to Claim ITC?

Every regular taxpayer is required to include the amount in GSTR 3B. Up to 20% of the allowable input tax credit that the supplier reports in the automatically generated GSTR 2A return may be claimed by the taxpayer in GSTR 3B on a provisional basis. Before moving further with GSTR 3B, the taxpayer must double-check the GSTR 2A data and resolve any mismatch in numbers. This process is known as the reconciliation of ITC.

A taxpayer was allowed to claim any amount of the provisional input tax credit before October 9, 2019. The Provisional input tax credit is limited to 20% of the Eligible ITC available in GSTR 2A, according to CBIC's notification, which is effective as of October 9, 2019.

This makes it crucial to match the purchase register with the GSTR 2A as the amount of input tax credit recorded in GSTR 3B will be the sum of the actual input tax credit in the GSTR 2A and the provisional input tax credit, which is equal to 20% of the actual valid input tax credit in the GSTR 2A.

How to Calculate ITC?

Consider the following example to understand better how the input tax credit is calculated.

For Rs. 500, Mr Sharma, a steel manufacturer, purchased raw steel to make steel plates and glasses. He spent another Rs. 100 on more raw materials. Assume that the GST for steel is 18%, and the GST for the other raw materials is 28%. As a result, the business invested Rs. 90 in raw steel and Rs. 28 in other raw materials. Mr Sharma spent a total of Rs. 118 on input tax.

Mr Sharma chooses to sell his goods at Rs. 800 plus GST after considering the cost of producing the steel plates and glasses utilising the other raw materials. Mr Sharma will generate an invoice for Rs 944 on the steel plates and glasses if the tax on a steel utensil is 18%, making the tax on his goods Rs. 144.

Therefore, Mr Sharma pays the distributor Rs. 144 GST for each sale. He paid Rs. 118 in GST when he bought his input raw materials. He can now deposit the Rs. 26 difference with the government after subtracting Rs. 118 he paid toward input GST from the Rs. 144 GST. Retailers and distributors charge GST and are eligible for the Input Tax Credit at all subsequent levels.

Reversal of ITC

In some circumstances, the input tax credit previously claimed must be reversed upon the occurrence of specific events. The reverse could be due to occurrences like the usage of capital goods for non-business purposes, items that were later lost or distributed as free samples, or excess credit that was previously claimed. Some of these products might also spark interest in addition to reversal.

Reversing an input tax credit means that the amount is added to the taxpayer's output tax liability from the reporting standpoint. Nearly all input tax credit reversal instances involve the taxpayer's internal records and procedures, making them impossible to determine solely based on GSTR 2A data.

Situations where ITC can be Reversed

  • They are failing to pay the supplier 180 days after the invoice's due date.

  • The items and services are employed for private consumption, whether inputs or capital assets.

  • The products and services used to create or provide the exempt products or services.

  • Sale of equipment or capital items for which an input tax credit was claimed.

  • The input service distributor is the one who issues the credit notes.

  • The Act's section 17(5) does not permit the supplies.

  • The input tax credit is reversed when a registered regular taxpayer becomes a composite taxpayer.

  • Interest must be paid from the day the credit is used until the date the amount is reversed and paid.

  • Recovering the reversed credit is not subject to any time restrictions.

Availing ITC on Reverse Charge

Reverse charge transactions allow the recipient to deposit the tax and then claim it as an Input Tax Credit, unlike forwarding charge transactions, where the supplier must pay the tax before the recipient may claim it. Additionally, the interim ITC rule governing 10% input tax credits does not apply to reverse charge transactions. Due to this, it may be the only Input Tax Credit that is entirely in your control.

If the following requirements are met, an input tax credit may be claimed when tax is paid using the reverse charge mechanism in the same month the payment is made.

  • Cash has been used to pay off the debt.

  • The products or services were utilised for commercial purposes.

  • Since an unregistered provider cannot produce a tax invoice, the purchases are self-invoiced.

Keys to Claim an Accurate ITC

Every taxpayer's primary goal is to utilise input tax credit to the fullest extent possible while abiding by all GST law requirements and regulations. The methods listed below can aid in effectively claiming an input tax credit:

  • Internal Processes and Controls Concept:

Input tax credit calculation requires additional data from the accounting or ERP systems and the GST system, specifically GSTR2A. Therefore, there are several internal stages and events that taxpayers need to monitor to swiftly and accurately compute ITC. This involves identifying and promptly documenting checkpoints like the receipt of products and the receipt of the last lot of goods. 

A negative List of Goods and Services for ITC claims can be identified with the aid of a good Product and Service Master maintained at the accounting level. A technique to identify occurrences connected to the reversal of ITC can also help reduce future issues by recording invoice level data concerning other relevant information such as the type of goods - input, the objective of the transaction - business, non-business, etc. Automation of data entry can reduce errors as well.

  • Dependable GST Reconciliation: 

The information vendors provide serves as the government's starting point for tracking input tax credit claims made by recipients. The internal (procurement receipts) and external (GSTR-2A download from the GST system) versions of the same data must be compared and matched. This is the primary goal of GST reconciliation.

Taxpayers can gain deep insights and develop action plans for maximising their input tax credit by combining the reconciliation results with the additional data from internal systems. While the matched invoices clearly show that input tax credit is accessible, the mismatched and missing invoices must be further examined to determine whether there is any possibility of turning these into a claimable input tax credit.

  • Reports in depth

Following reconciliation, a tidy and insightful summary of the findings is needed to delve deeply into the transactions that demand attention. To maximise input tax credit, the urgent need is to derive insights and reports from GST reconciliation findings to study the same data from numerous angles. A group-level view with the ability to dig down to the GSTIN level is also desirable, given that a business entity may have multiple GST registrations. Reconciliation makes it easier for taxpayers to identify the available ITC confidently. Keeping track of invoices that require additional action, such as follow-up with suppliers, or are provisionally claimed, can prevent double claims.

  • Maintaining Supplier Compliance:

Suppliers' non-compliance badly impacts input tax credit claims because the government is tightening its regulations regarding GST fraud. Not only is the provisional ITC claim affected by supplier non-compliance, but GSTIN is also banned from being used to generate e-way bills. Suppose the returns GSTR 1 and GSTR-3B have been filed for each of your suppliers listed in the purchaser registry. Not only should the GSTR 1 filing status be known, but also the filing frequency.

Conclusion

The input tax credit is one of the crucial elements of GST that improves system performance and promotes corporate expansion. The input tax credit reduces GST liability to the amount already paid by a business while purchasing products and services for business use.

ITC Reversal can be challenging to understand and calculate, not to mention a tedious process. This is especially true if the number of transactions is vast. You can save time and effort by using entirely automated software that can undertake laborious tasks on your behalf. Such software, which is an automatic and scalable solution to all the time-consuming processes of computing input tax credit, reversals, understanding the requisites and procedures for claiming ITC, and other GST-related tasks, is provided by Busy Accounting Software.