How to Claim ITC in India

Input tax credit is a mechanism that allows a taxpayer to claim credit for the taxes paid on the purchase of inputs and use it to reduce the overall tax liability. For instance, if a business owner purchases raw materials and pays the tax on them, he can claim the tax as input tax credit and use it to offset the tax he owes on selling their finished goods. This helps avoid the cascading effect of taxes and ensures that only the amount added at each stage is taxed. 

In order to claim ITC, a business owner must pay the supplier for the received supplies, including tax, within 180 days from the invoice’s issuance. If the purchaser fails to do so, the credit amount they could have availed will be included in their output tax liability. Once the purchaser pays the total amount to the supplier, they will be available to avail ITC. In the case of partial payment, ITC credits can be claimed in proportion to the payment.

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:

• The business should be registered under GST and possess a valid GSTIN. 
• The goods or services for which input tax credit is claimed must be used for business purposes and not personal consumption.
• The supplier must pay the GST charged on the invoice. 
• The business owners must possess a valid tax invoice or debit note issued by the supplier. 
• The business owner must have received the goods or services. 
• The tax charged on the invoice must be paid by the supplier to the government. 
• The business owner must have filed his GST returns regularly. 
• The ITC cannot be claimed for certain goods and services such as motor vehicles, personal expenses, and food and beverages. 

Documents Required for Claiming ITC

Tax Invoice: The business must have a tax invoice issued by the supplier for the goods or services purchased.

Debit Note: In case of any additional charges or increases in the value of goods or services, the supplier may issue a debit note. The business must possess the debit note to claim ITC.

Bill of Entry: To import goods, the business must have a bill of entry issued by the customs department.

Invoice issued under Reverse Charge Mechanism: If the supplier is unregistered, or the supply is covered under the reverse charge mechanism, the business must have an invoice issued under reverse charge.

Credit Note: In case of any reduction in the value of goods or services or return of goods, the supplier may issue a credit note. The business must possess the credit note to adjust the ITC.

Delivery Challan: For the supply of goods, the business must have a delivery challan issued by the supplier.

Purchase Order: The business must have a purchase order or agreement with the supplier.

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 who are 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.

How to Calculate ITC?

Consider an 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 taking into consideration 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

Reversal of ITC refers to the situation in which a taxpayer must return or repay the tax credit previously claimed on inputs or services used in producing goods or services. This reversal may occur for various reasons, such as the return of goods or services, non-payment to the supplier, or the expiry of the time limit for availing of input tax credit. In such situations, the taxpayer must reverse the input tax credit claimed earlier and pay the corresponding tax amount. 

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, serve 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

Input tax credit is one of the crucial elements of GST that improves system performance and promotes corporate expansion. 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.