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.
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 amount of GST they paid on purchases.
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|
The conditions required to claim Input Tax Credit are as follows:
Cases where the taxpayer will not be eligible to claim ITC are mentioned below:
There were many different 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 tax. 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.
The below-shown chart must be filled out to submit an input tax credit under GST. 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 documents required to claim an ITC in India are
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:
A business can claim ITC if the following conditions are fulfilled:
A company operating under the composition system is ineligible for the input tax credit. ITC cannot be claimed for exempt goods or personal use.
There are two types of GST schemes, The regular GST scheme and the Composite GST scheme.
GST registration is required after the threshold limits of Rs. 20 lakhs and Rs. 40 lakhs in the relevant categories of service and goods sales. 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:
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.
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% of the business’s total revenue 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 Composite GST 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:
The drawbacks of the composite GST scheme include the following:
An ITC will be reversed under the following circumstances:
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 reconciliation of ITC. It is crucial to avoid unwanted scrutiny and notices from the tax authorities.
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.
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.
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.
Business transfers and 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.
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. You can take a free trial of Busy Accounting Software to automate all your GST-related tasks.