The Role of ITC in Reducing Tax Burden for MSMEs
The Input Tax Credit (ITC) enables MSMEs to minimize their taxation by claiming credit for taxes paid on purchases. It helps them balance their tax liabilities, increase their cashflows, bring down costs, comply with GST norms, and make their operations more efficient and competitive in the market.
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What is ITC and Its Importance for MSMEs?
The Input Tax Credit (ITC) is a GST provision that allows businesses to claim a deduction for taxes paid on purchases used in their operations. If you’re wondering, what is ITC? It essentially refers to the credit a business can claim for the tax it pays on inputs to reduce its tax liability on outputs.
This deduction is taken into account when determining the tax due on sales. GST is the tax a business pays when it buys goods or services from a registered supplier. When the business sells its products or services, it charges customers GST. The taxes paid on purchases (input tax) are set off against the taxes collected on sales (output tax).
Any difference becomes the net tax liability. The amount the government then collects. This process, known as the utilization of Input Tax Credit, reduces the overall tax burden and ensures efficient tax compliance.
For example,
A manufacturer purchases raw materials worth Rs 50,000. The GST rate on raw materials is 18%, so the Input Tax is Rs 9,000 (50,000 * 18%). The manufacturer sells the finished product for Rs 80,000, with a GST rate of 18%. The Output Tax on the sale is Rs 14,400 (80,000 * 18%).
Calculation of ITC:
- Input Tax Credit: The manufacturer has already paid Rs 9,000 in GST on raw materials. The business can claim this input tax credit.
- Output Tax Liability: The manufacturer collects Rs 14,400 GST on the product’s sale.
- Utilizing ITC: The input tax credit of Rs 9,000 can offset the output tax liability of Rs 14,400.
- Net Tax Liability: Output Tax (Rs 14,400) – Input Tax Credit (Rs 9,000) = Rs 5,400
Hence, the business must pay Rs 5,400 to the government as the net tax liability.
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Importance for MSMEs:
Input Tax Credit is critical for MSMEs as it directly impacts their cost efficiency, compliance, and competitiveness. Here’s how ITC supports MSMEs in achieving these objectives:
- Tax Reduction: Lowers the overall tax burden by offsetting taxes paid on inputs.
- Cost Efficiency: Cuts down on production and operational costs.
- Cash Flow Management: Improves liquidity by decreasing outflow.
- Compliance Incentive: This also encourages businesses to maintain books and comply with GST.
- Competitiveness: Ensures MSMEs maintain competitiveness through fair pricing.
Steps to Claim Input Tax Credit Under GST
Follow these steps to easily claim ITC under the GST system:
- Access the GST Portal: Visit www.gst.gov.in. The GST Home page will be displayed.
- Login to the GST Portal: Use valid credentials to log in.
- Navigate to ITC Forms: Click on Services > Returns > ITC Forms.
- Prepare ITC-01 Form: On the GST ITC Forms page, click the PREPARE ONLINE button under the GST ITC-01 tile if you want to create the statement by entering details directly on the portal
- Declare Input Tax Credit Claim: Select the appropriate section for your claim from the Claim made under the drop-down list.
- – Enter the supplier’s GSTIN.
- – Provide the Invoice Number and Invoice Date (ensure the date is before GST approval).
- – Select the Goods Type from the drop-down.
- – Enter the Description of Inputs (held in stock or semi-finished/finished goods).
- – Choose the Unit Quantity Code (UQC) from the drop-down.
- Provide the Invoice Value (adjusted by debit/credit notes): Enter the ITC amount under Central Tax, State/UT Tax, Integrated Tax, and Cess, as applicable. Ensure that the CGST and SGST amounts are equal and that the total CGST and SGST do not exceed the invoice value. For interstate purchases, IGST should not exceed the invoice value.
- Save the Details: After entering the details, click the SAVE button. The invoice will be saved. You can edit or delete it if necessary.
- Preview the ITC-01 Form: Click the PREVIEW button to see a draft of your GST ITC-01 form. The preview will be displayed in PDF format.
- Submit the ITC-01 Form: Click SUBMIT to finalize the form. After clicking PROCEED, the form data will be frozen, and no changes can be made. Refresh the page, and the form’s status will change to Submitted.
- Update Chartered Accountant’s or Cost Accountant’s Details (if applicable): If the ITC claimed exceeds Rs. 2 lakh, update the Chartered Accountant (CA) or Cost Accountant details:
- – Enter the name of the firm issuing the certificate.
- – Enter the name and membership number of the certifying CA or Cost Accountant.
- – Select the Date of Issuance.
- – Upload the CA/Cost Accountant certificate in JPEG format (max. 500 KB).
- – Click SAVE CA DETAILS.
- File ITC-01 with DSC/EVC: Select the declaration checkbox. Then, choose the authorized signatory from the drop-down list. This will enable the options to file via DSC or EVC.
- – For DSC Select the certificate and click SIGN.
- – For EVC Enter the OTP sent to the authorized signatory’s email and mobile number registered with GST, then click VERIFY.
- Confirmation and Filing: After successful submission, a success message will appear, and an ARN (Acknowledgement Receipt Number) will be generated. The taxpayer will receive an SMS and email. Refresh the page, and the form’s status will update to filed.
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By understanding what ITC is, businesses can navigate these steps more effectively and maximize their claims under GST regulations.
What Constitutes Eligible Input Tax Credit?
A registered person (including Input Service Distributor) can claim Input Tax Credit (ITC) only if they have a valid tax invoice or debit note issued in favor of the registered person by the supplier, goods and/or services have been received, the appearance of filing of the supplier under GST in GSTR-2B, the goods/services should be used in furtherance of business, and payment is made within 180 days from the date of invoice. To be able to determine eligibility for Input Tax Credit (ITC) with the help of a GST calculator, you need to go through:
- Sum GST Paid on Purchases: Add up the GST paid on all eligible purchases during the relevant tax period.
- Identify Eligible Inputs: Determine which goods and services qualify for ITC.
- Calculate Total ITC: Multiply the total eligible GST paid on purchases by the applicable input percentage.
- Subtract ITC from GST Payable: Subtract the calculated ITC from the GST payable on sales for that tax period to determine the net tax liability.
Practical Tips for MSMEs to Maximize ITC
- Maintain Accurate Records: Ensure correct maintenance of all invoices and receipts to avoid loss of eligible ITC.
- GST Return Due Date: File the returns before the due date and ensure that you reconcile GSTR-2B with your purchase records to ensure that you claim every eligible credit.
- Monitor Blocked Credits: Monitor the input tax credit on capital goods and items that are not eligible for ITC, like personal expenses or exempt supplies, to avoid unwarranted claims.
Conclusion
In conclusion, ITC plays a crucial role in reducing tax burdens for MSMEs by improving cash flow and cost efficiency. For MSMEs looking to fully utilize ITC, understanding what ITC is and its implications can drive better tax management. Tools like BUSY simplify ITC claims, ITC reversals, and more, ensuring accurate GST filing and timely reconciliation, empowering MSMEs to maximize their tax benefits and stay compliant.
Hi there! I’m a Chartered Accountant with over 20 years of experience in financial accounting and a passion for writing. I enjoy simplifying complex topics like GST and income tax, believing that learning should be a lifelong journey. I'm here to share insights and make financial matters easier for everyone!
Frequently Asked Questions
- Who can claim an input tax credit under GST?GST-registered entities such as manufacturers, traders, and service providers can claim input tax credit (ITC) for eligible goods and services purchased.
- What is input tax credit in GST?Input Tax Credit (ITC) ITC is a deduction that a business can claim while paying their taxes on purchases.
- What is an eligible input tax credit?Eligible Input Tax Credit (ITC) is the tax credit on purchases utilized for business (with conditions and restrictions imposed through the GST Act).
- How does ITC benefit MSMEs?ITC enables MSMEs to claim tax offsets on their purchases, leading to lower tax burdens, improved cash flow, cost reduction, and increased competitiveness.
- What are the conditions to claim ITC under GST?The conditions are valid invoices, receipt of goods/services, GST compliance, and Payment to suppliers within 180 days of the bill date.
