What expenses can be claimed as ITC ?

Businesses can offset the tax paid on inputs used to produce goods and services against the tax they have to pay on the sale of goods and services. This mechanism is known as Input Tax Credit, or ITC. However, not all expenses qualify for ITC. Laws regarding what can or cannot be claimed as ITC are complex.

Businesses can offset the tax paid on inputs used to produce goods and services against the tax they have to pay on the sale of goods and services. This mechanism is known as Input Tax Credit, or ITC. However, not all expenses qualify for ITC. Laws regarding what can or cannot be claimed as ITC are complex.

So, in this article, we will explore what expenses can and cannot be claimed as Input Tax Credit, how to calculate and how to claim ITC. For small business owners, understanding the ins and outs of ITC will help save a significant amount of money. Claiming the correct amount of ITC is a complicated process, so you should consider using a robust GST software to help you out with the myriad compliances that are required for GST, and to maximise your ITC.

What is Input Tax Credit?

The tax that a person already paid at the time of the purchase of goods or services and which is eligible as a deduction from the tax due is referred to as an input tax credit. ITC is a system that guarantees to prevent tax cascading. Simply put, levying tax on tax is what cascading taxes means.To learn more, read our complete guide to Input Tax Credit.

Expenses that can be Claimed as ITC

ITC is claimed solely for commercial endeavours. It is not applicable on expenses made for personal use, exempted goods, or goods for which ITC is expressly not accessible. ITC can be accessed for inputs such as raw materials, materials used for packing, engineering spares, consumables, printing, and stationery products. 

Input Tax Credit can also be claimed on capital goods such as:

• Plant and machinery
• Support structures used for plant and machinery
• Motor vehicles used for transportation of goods
• Repairs required for such transporting trucks
• Electronics, furniture, appliances, etc.

Registered taxpayers can also claim ITC on services, for instance, housekeeping charges, factory rent, manpower supply, internet services, loading and unloading, mobiles and telephones used for office purposes, bank charges, repair and maintenance, advertisements, advocate fees, expenses on conferences, etc.

Common Credit in ITC

A company may get capital goods, input commodities, and input services from outside sources. Additionally, the items and services brought in may be employed for either private or commercial purposes. Under GST, the aggregate input tax credit offered on all such purchases is referred to as Proportionate Credit or Common Credit. The taxpayer is not eligible to claim credit for inputs utilised for private purposes. Thus, the common credit should be applied proportionately when paying the production tax liability.

The common credit can be utilised under two fundamental criteria:

1. ITC is permitted only for commercial purposes. ITC cannot be claimed for the personal use of goods and services.
2. ITC is eligible only for selling taxable goods and services. ITC does not apply to exempted supplies.

To learn more, read our article on ITC for Common Credit.

How to Calculate ITC?

Let’s 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 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 in GST for each sale. He paid Rs. 118 under GST when he bought his input raw materials. He can now deposit the Rs. 26 difference with the government after subtracting the 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.

Who can Claim ITC?

To claim ITC, a few conditions are laid out in 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 dealer must possess a tax invoice or debit note issued by the input service provider.

• Receiving the aforementioned products, services, or both is required.
• The GST payment due to the government for this supply has been made by the supplier.
• The input tax credit can only be used when the final batch of goods is received when they are purchased in parts.
• If depreciation has been 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. 

Eligibility for ITC

The following are the eligibility criteria for the input tax credit:

• The input tax credit utilised for commercial reasons will be deemed eligible, and those used for other purposes, except blocked credit, will not be eligible to claim ITC.
• Taxable supplies and exempted goods determine whether the ITC is eligible or not.
• A proportionate credit is given when the product or service is utilised for taxable and exempt goods or services.
• It is only applicable to people who are registered taxpayers.
• Zero-rated goods are taxable, and any input goods or services utilised to provide such external supplies would be eligible for credits.

Goods or Services Ineligible for ITC

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

• Motor vehicles, unless provided in the course of business or used to provide taxable services like the transportation of passengers; the transport 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.

ITC Under 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 options.

Read more on this in our article on ITC on Capital Goods.

ITC on Job Work

On items or capital goods given to an employee for that work, one may make an ITC claim. Even if the goods are provided to the employee without being delivered to her 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.

Learn more about this concept in our article on ITC on Job Work.

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.We recommend reading our guide to Input Service Distributor for more information.

ITC on Transfer of Business

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.

To know more, read our article on ITC on Transfer of Business.

Conclusion

Input tax credit under GST provides a smooth flow of taxes and aids business expansion by eliminating tax cascading. The above mentioned requirements determine the eligibility of expenses covered by the input tax credit.

In summary, ITC can only be claimed for the tax paid on goods and services that are used for business purposes, not personal. Also, ITC can not be claimed when selling exempted goods, as no tax is collected on the sale of these goods, and therefore there is no tax against which you can offset your input tax.

Consider using a powerful GST Software like BUSY to help you maximise your Input Tax Credit through complete GST compliance.