Complete Guide to Input Tax Credit under GST in India

Input Tax Credit is one of the most significant features of GST. It applies 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 GST registered Individual. 

 

Incorrect input tax credit claims may result in fines, penalties, interests, and taxes.  Even a small error can result in the denial of an Input Tax Credit. Busy is a complete GST accounting software with a GSTIN validation feature that will greatly help ITC calculation. To know how to claim maximum ITC read here for more information.

 

What is the Input Tax Credit?

The term "input tax credit," or "ITC," refers to the tax that a business pays on a purchase that it can apply to reduce its tax liability when it makes a sale. To frame it another way, companies can decrease their tax liabilities by claiming credits up to the total GST they paid on purchases.

 

Input Tax Credit Explained with an Example

Input tax credit under GST implies that you can subtract the tax you have already paid on purchases from the output tax burden on the provision of goods and services; the outstanding balance must be paid as tax to the government. 

For instance, suppose Mr Karan purchased goods and services worth Rs 30,000, on which the GST is 18%, i.e., Rs 5,400. Thus, the total amount paid by Mr Karan would be Rs. 35,400, out of which Rs. 5,400 will be paid as GST.  Later, he sells the product for Rs 40,000 at an 18% rate of GST, which is Rs 7,200. This Rs. 7,200 is due to the Government (as applicable under the different types of GST). However, since the Government has already received Rs. 5,400 as GST from Mr Karan, he is now only liable to pay the difference amount, which is Rs. 1,800. The Rs 5,400 that Mr Karan has already paid while purchasing the goods and services can be claimed by him as an Input Tax Credit. A visual representation of this is given below:

 

Description	Amount in Rs
GST payable (outward)	7,200
GST paid on the purchase	5,400
Net GST payable	1,800

 

How to Claim Input Tax Credit in India?

Regular taxpayers are required to declare their monthly GST returns' ITC totals. The aggregate amount for ITCs that are not eligible and eligible and ITCs that were reversed during the tax period must be included in the table above. According to the table's format, a taxpayer may, provisionally, claim ITC in Form GSTR-3B up to a maximum of 20% of the qualifying ITC disclosed in the automatically generated GSTR-2A return by suppliers.

 

In light of this, a taxpayer should double-check the GSTR-2A amount before submitting Form GSTR-3B. However, the CBIC has announced that beginning on October 9, 2019, a taxpayer may only claim up to 20% of the available valid ITC on the GSTR-2A as a provisional ITC. In other words, it's critical to match Form GSTR-2A with the expenditure sheet.

 

The below-shown chart must be filled out to submit an input tax credit under GST. 

 

Documents Required to Claim ITC in India

The documents required to claim an ITC in India are

1. The supplier should avail an appropriate tax invoice for goods and services

2. The supplier should provide an appropriate debit note to the recipient. 

3. The recipient should issue an invoice and proof of tax payment.

4. A bill of entry should be issued.

5. A refund check or one that has been issued by the Input Service Distributor (ISD) in compliance with the GST invoicing requirements.

6. The provider states the supply of the goods or services.

 

Who is Eligible to Claim Input Tax Credit?

The conditions required to claim Input Tax Credit are as follows:

1. A person can claim an Input Tax Credit when they possess a tax invoice issued by a supplier registered under GST.

2. The person claiming ITC can do so if they have received the goods or services.

3. The supplier to the appropriate government pays the tax on goods or services. 

4. The person claiming the tax has furnished the GST return.

5. If the person receives inputs in instalments, he will be eligible to claim the ITC only after receiving the last instalment.

6. When a person additionally claims depreciation under the Income Tax Act for the GST component, the individual is not eligible for an input tax credit under the GST for capital goods. One cannot simultaneously claim input tax credits and depreciation for the same goods and services.

7. A person will not be eligible to claim ITC if it is not claimed within the time limit. 

 

Who is Not Eligible to Claim an Input Tax Credit?

Cases, where the taxpayer will not be eligible to claim ITC, are mentioned below:

1. ITC is not for the supply of food and beverages, outdoor catering, cosmetic or plastic surgery, or health services. 

2. ITC cannot be claimed for general insurance services, servicing, repair, and maintenance.

3. ITC does not apply to sell memberships in a club or health fitness centre.

4. Travel perks provided to employees when they are on vacation, such as leaves, or home travel concessions, are not eligible for ITC.

5. ITC shall not be offered any services under a labour contract. ITC cannot be used to develop an immovable property unless the input service is used for subsequent work contract services.

6. A non-resident taxable person cannot obtain ITC for goods or services they receive. ITC is only accessible on products it imports.

7. ITC will not apply to products or services utilised only for non-business objectives. 

8. An input tax credit cannot be claimed for misplaced, stolen, destroyed, written off, or given away as gifts or free samples.

9. Independent restaurants will only be required to pay 5% GST, but they will not be eligible for any input tax credits.

 

What is the Time Limit to Claim Input Tax Credit in India?

If you want to make an ITC claim as a consumer, you must pay your supplier for the services you received, within 180 days of the invoice's issue date, along with your tax. If you don't, your output tax liability will increase to include the credit you would have received if you had filed an input tax credit claim. 

The following situations do not qualify for the right to claim input tax:

1. The return must be submitted by September next fiscal year or later.

2. For the pertinent year, the annual return has been submitted (concerning the filing date).

 

What are the Conditions for Claiming Input Tax Credit?

A business can claim ITC if the following conditions are fulfilled:

1. A GST-compliant invoice is provided.

2. The invoice was submitted to the GSTN by its supplier.

3. The government has received GST from its supplier.

4. Returns have been filed.

A company operating under the composition system is ineligible for the input tax credit. ITC cannot be claimed for exempt goods or personal use.

 

Input Tax Credit Based on GST Schemes in India

There are two types of GST schemes, The regular GST scheme and the Composite GST scheme. 

Input Tax Credit under the Regular GST Scheme in India

GST registration is required after the threshold limits of Rs. 20 lakhs and Rs. 40 lakhs in the relevant service and goods sales categories. This rule has an exception in some places where this scheme is available if the previous year's turnover was less than Rs. 75 lakhs. The states that allow the use of this program are Uttarakhand, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Manipur.

Monthly returns must be filed by taxpayers subject to the regular GST. It offers the benefit of an input tax credit for the GST that was paid while purchasing services and goods.

Under the regular GST scheme, the supplies can be interstate and intrastate. The tax is levied at the prescribed rates.  

The benefits of the standard GST regime include

• It can sell via an e-commerce platform,

• Has an unrestricted area for business, and 

• Can claim credit for input taxes paid. 

The following are the drawbacks of the standard GST scheme:

It has more compliance, meaning that there are more returns to submit. In e- ledgers, there is less liquidity to prevent substantial tax amounts, and an individual can only access input if the supplier has submitted a return.

 

Input Tax Credit under Composite GST Scheme in India

The purpose of introducing the composite GST scheme was to aid small enterprises. The seller must be charged 1% of the business's total revenue for traders, 2% of the firm's total revenue for manufacturers, 5% of the business's total revenue for restaurants, and 6% for service providers.

The dealer cannot issue a tax invoice since the tax must be paid out of pocket by the dealer. The method requires minimum compliance, and taxpayers are exempt from keeping account records.

Under the GST Composite Scheme, the supplies can be only within Intrastate. The tax is not permitted to be levied in the Composite GST scheme.

The benefits of the composite GST scheme include the following: 

• It requires less compliance, 

• Has a smaller tax burden, 

• Doesn't require keeping account records, and 

• Has high liquidity because the taxes are levied at a reduced rate. 

The drawbacks of the composite GST scheme include the following:

• It only conducts business within a limited geographic area since it forbids interstate transactions and offers dealers no input tax credits.

• The taxpayer is ineligible to supply exempt goods or goods through an online store.

 

Reversal of Input Tax Credit

An ITC will be reversed under the following circumstances: 

1. If ITC is claimed against any bills that are not paid within 180 days of issuing, it will be reversed.

2. If the exporter issues the credit note to ISD, ITC will be reversed.

3. If an input is used partially for excluded supplies or personal use, the ITC will be reversed. Products and services used for personal use will have a proportionate reversal, whereas exempted commodities are not eligible for input tax credits under GST.

4. Capital goods partially used for business and partially for exempted supplies or personal use will have their ITC reversed.

5. If the total ITC on inputs that are exempt or utilised for non-business purposes surpasses ITC that was reversed throughout the year, once the annual return is submitted, the difference is charged to the output tax liability along with any applicable interest.

You can read our detailed article on the Reversal of Input Tax Credit here.

 

Reconciliation of Input Tax Credit

Reconciliation compares two data sets to identify disparities. Reconciliation also aids in keeping track of human errors.

Essentially, the Input Tax Credit claimed by a business must match the input tax credit declared by suppliers of that business. Any difference in these figures must be corrected or ‘reconciled.’

Whenever a supplier files GSTR-1, where he discloses his monthly sales, the data pertinent to a particular recipient is recorded automatically in that recipient's GSTR-2A and GSTR-2B. When the recipient claims ITC in Form GSTR-3B (monthly), that figure must match the ITC calculated automatically based on GSTR-2B.

Reconciling data entered in Form GSTR-3B with auto-generated data in GSTR-2B is the most popular technique for reconciling ITC. It is crucial to avoid unwanted scrutiny and notices from the tax authorities.

 

Input Tax Credit in Special Cases

ITC for Capital Goods

Any input tax credit applicable to capital items may be used simultaneously. If a person has already claimed ITC depreciation for their GST component, they are not eligible to claim ITC for capital items. Either income tax depreciation or ITC claims are allowed.

 

ITC on Job Work

One may make an ITC claim on items or capital goods given to an employee for that work. Even if the goods are provided to the employee without being delivered to their place of business, input is still permitted. It will be presumed that the inputs were supplied to the employee on the day they were sent if the employer does not receive the items back from the employee within a year of sending them.

 

ITC Provided by Input Service Distributor

The branch office, corporate headquarters, or the registered office of the GST-registered person can all be considered input service distributors.

Additionally, ISD collects ITC from all of its purchases and distributes it to all its receivers under different headings such as IGST, CGST, SGST/UTGST, or cess.

 

ITC on Transfer of Business

Business transfers, mergers, and amalgamations are eligible for ITC claims. The transferor will have ITC available at the business transfer date, which it can transfer to the beneficiary.

 

Advantages of GST Input Tax Credit

There were many kinds of indirect taxes in the old tax system, and the input tax credit of one tax could not be recovered against the input tax credit from another. For instance, retailers that previously paid service tax on the rent for their stores were unable to combine the input tax credit for service tax with the VAT they had levied on the sale of goods. With the implementation of the GST, these problems have been resolved because there will only be one indirect tax imposed, and a credit will flow without interruption.

 

Conclusion

The feature of the Input Tax Credit serves as the foundation of GST and is one of the main justifications for implementing GST. ITC thus ensures a seamless flow in the tax system and helps a firm's growth. 

 

Other related articles to ITC

Who can claim ITC in India?

Reversal of Input tax credit

Special cases under which ITC is not applicable

What expenses can be claimed as ITC?

Input tax credit on Capital goods

Claiming ITC on the transfer of business

Availing ITC as per section 16 (2) (aa)

Reconciliation under GST

Input tax credit on common credit

Input service distributor under GST

Input tax credit on Job work

How to claim Maximum ITC: Time limits and tips

Everything you need to know about GST Rule 86B: Limitation on ITC utilisation in the electronic credit ledger