What Expenses Can Be Claimed as Input Tax Credit ITC?

This article explains which expenses businesses can claim as Input Tax Credits and how to calculate and claim them.

For small business owners, understanding the ins and outs of ITC will help save a significant amount of money. GST software can help you readily claim the right amount of ITC and meet GST requirements. It simplifies the process and ensures you get the most out of your ITC.

What is Input Tax Credit?

An input tax credit (ITC) is the tax you already paid when buying goods or services. Deduct this amount from the total tax owed. ITC is a system that guarantees the prevention of axe cascading. Cascading taxes mean levying tax on tax. To learn more, read our complete guide to Input Tax Credit.

Expenses Eligible for ITC Claims

Companies claim ITC solely for commercial endeavours. This rule excludes expenses for personal use, exempt goods, or goods not eligible for ITC claims. Companies can use ITC to purchase raw materials, packing materials, spare parts, consumables, printing, and stationery items. 

Claim ITC 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.

Taxpayers can get tax credits for various expenses. It includes cleaning, rent, internet, cell phones, bank fees, repairs, advertising, legal fees, and conferences.

Common Credit in ITC

A company may acquire capital goods, input commodities, and services from outside sources. Additionally, it may use the items and services acquired for private or commercial purposes. Under GST, businesses know the aggregate input tax credit on all such purchases as Proportionate Credit or Common Credit. The taxpayer cannot claim credit for inputs utilised for private purposes. Therefore, you should apply the standard credit when paying the production tax liability.

Utilise the standard credit under two fundamental criteria:

1. You can use ITC only for commercial purposes, not for personal use of goods and services.
2. ITC is eligible only for selling taxable goods and services.
3. ITC does not apply to exempted supplies.

How to Calculate ITC?

Let’s consider an example to understand better how to calculate the input tax credit.

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 different raw materials. Mr Sharma spent a total of Rs. 118 on input tax.

Mr Sharma sells his goods for Rs. 800 plus GST after factoring in the production costs of steel plates and glasses made from other raw materials. If the tax on a steel utensil is 18%, Mr Sharma will generate an invoice for Rs. 944 on the steel plates and glasses, 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.

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Who Can Claim ITC?

Section 16 of the CGST Act outlines a few conditions for claiming ITC. 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 from the input service provider.

• You must receive the products, services, or both.
• The supplier has made the GST payment to the government for this supply.
• You can only use the input tax credit when you receive the final batch of goods after purchasing them in parts.
• You cannot claim an input tax credit if you have claimed depreciation on the tax of a capital good. 
• The registered taxpayer should pay the supplier within 180 days of invoice ice. 

Eligibility For ITC

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

• You can claim input tax credits used for business purposes. You cannot claim credits used for non-business purposes, excluding blocked credits, as input tax credits.
• We give a proportionate credit when you use the product or service for taxable and exempt goods or services.
• Applicable for registered taxpayers only.
• Goods that are zero-rated for tax still allow credits on input goods or services provided.

Goods or Services Not Eligible for ITC

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

• Businesses use motor vehicles for functional purposes or to offer taxable services. These services include passenger transportation, product transport, vehicle operation instruction, or similar transportation services.
• Registered taxpayers cannot use the goods or services they receive to provide the same type of service. This rule does not apply to outdoor catering, cosmetic and plastic surgery, and health services.

Eligibility & Conditions for Taking ITC Under GST

Section 16 of the GST Act outlines the eligibility and conditions for taking ITC. A registered person can claim ITC if:

• They have a tax invoice or debit note.
• They have received the goods or services.
• The supplier has paid the tax to the government.
• They have filed the GST return.

General Case: Eligibility and Conditions for Taking Input Tax Credit

Businesses must ensure the following to claim ITC:

• GST-Registered users.
• They have received goods or services.
• They possess a tax invoice or debit note from a supplier.
• The supplier has paid the tax.
• They have filed the required GST returns.

Club, Health, and Fitness Centre Membership

• If your employer doesn’t provide car rental, life insurance, or health insurance, you may need to get them separately.
• Employees on vacation receive travel benefits such as leave or home travel discounts.
• Goods and services, in addition to equipment, are the main items received for constructing real estate. However, they cannot use them to provide work contract services.
• Goods or services that have received tax payments under the composition program.
• Goods or services purchased for personal use.
• We gave away goods as gifts or samples or disposed of them.
• Tax paid following the discovery of fraud, willful deception, or suppression.
• Individuals pay tax for releasing commodities that authorities have impounded or confiscated.
• They released items that authorities had seized after paying taxes.

ITC Under Special Cases—ITC for Capital Goods

You can use any input tax credit applicable to capital items simultaneously. If someone has already claimed ITC depreciation for their GST, they cannot 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

One may claim an ITCon item or capital goods given to an employee for that work. The employee can enter items as expenses even if given to her outside work, which means she can still claim them as business expenses.

The location where she received the item doesn’t matter; she can still document it for reimbursement. If the employer does not accept the items back within a year, they assume they gave them to the employee when they were sent. The employer must return the items within a year. If not, the company considers them given to the employee.

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

ITC Provided by Input Service Distributor

A GST-registered person’s branch, central, or registered office can be input service distributors. ISD collects taxes on purchases and distributes them to different categories, such as IGST, CGST, SGST/UTGST, or cess. For more information, we recommend read our guide to input service distributors.

ITC on Transfer of Business

Business transfers, mergers, and combinations are eligible for ITC claims. The transferor will have ITC available on the business transfer date and can transfer it to the payee.

Conclusion

Input tax credit in GST helps businesses grow by avoiding double taxation and ensuring a smooth tax flow. The above requirements determine the eligibility of expenses covered by the input tax credit.

Businesses can only get tax credits for taxes paid on goods and services used for business, not personal use. Businesses can only claim Input Tax Credits for taxes paid on items used for business activities. Personal expenses are not eligible for Input Tax Credits.

You cannot claim ITC when selling exempted goods because you do not collect tax. It means there is no tax to offset your input tax. Consider using a powerful GST Accounting Software like BUSY to help maximise your Input Tax Credit through complete GST compliance.