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.

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    Input Tax Credit

    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.

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    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.

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    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.

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    • 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.

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    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.

    Frequently Asked Questions

    • What are the rules regarding ITC on advertisement expenses under GST?
      Businesses can receive tax credits for advertising expenses if they use the ads for business purposes. To qualify for tax credits, the supplier must provide accurate invoices. However, the price must not be for personal use or supplying exempt goods or services.
    • What are the eligibility and conditions for taking input tax credit under GST?
      To claim input tax credit, you need a tax invoice. You also need proof of receiving goods or services. Additionally, you need confirmation that the supplier paid GST. Finally, you need evidence of filing relevant returns. Furthermore, businesses must use the goods or services for business purposes.
    • What does Section 16 of GST state about the eligibility and conditions for taking input tax credit?
      Section 16 of the GST Act specifies the eligibility and conditions for taking input tax credits. It states that the recipient must have a tax invoice, has received the goods or services, and pay the tax to the government. It also mandates that the recipient file the relevant GST returns to claim the credit.
    • How is input tax credit on capital goods claimed under GST?
      Businesses can claim an input tax credit on capital goods under GST. They must use the capital goods for business purposes, not personal use. The company must possess a valid tax invoice, and the supplier must have paid the GST. Taxpayers claim the credit in the tax period when they receive the goods.
    • Can you provide an example of the input tax credit on capital goods under GST?
      For example, suppose a company buys a machine for ₹ $1,00,000 plus GST of ₹ $18,000. If the company meets all conditions, it can claim an input tax credit of $8,000 on capital goods. The company can use this credit to offset its GST liability.
    • What is input tax credit in GST, and how is it used with an example?
      Businesses can lower their taxes by claiming the GST paid on purchases as an input tax credit in GST. For example, a company owes ₹10,000 in GST but has already paid ₹4,000 on inputs. The company can use the input tax credit to lower its liability to ₹6,000.
    • Explain what input tax credit is in GST with an example.
      Input tax credit lets businesses subtract tax paid on inputs from their output tax liability. Input Tax Credit in GST, with Example: A manufacturer pays ₹5,000 in GST for raw materials and owes ₹8,000 in GST for finished goods. In that case, the net tax payable is ₹3,000 after claiming the input tax credit with GST.
    • What are the conditions for claiming ITC on advertisement expenses under GST?
      The advertisement must be for your business to receive a tax credit for advertising expenses. It would be best if you also had a valid invoice for the ad. The supplier must have paid GST for the ad. Make sure to claim the credit within the specified time frame.
    • What are the critical eligibility and conditions for taking input tax credit per GST laws?
      To claim input tax credit, you need a valid tax invoice. You also need proof of receiving goods or services. Additionally, you need to ensure the supplier’s compliance. Finally, you must file GST returns correctly.
    • How does one determine the input tax credit on capital goods with an example?
      Determine the amount of GST paid on capital goods. Ensure that you meet all requirements to receive a tax credit. A business can claim an Input Tax Credit (ITC) of ₹90,000 if they buy a delivery van for ₹5,00,000 plus ₹90,000 GST. You must use the van for business operations to claim the ITC.
    • Can ITC be claimed on imported goods under GST?
      Yes, ITC can be claimed on imported goods. The IGST paid on imports can be availed as Input Tax Credit, provided the goods are used for business purposes and all GST compliance requirements are met.
    • Can ITC be carried forward to the next tax period?
      Yes, ITC can be carried forward to the next tax period. Unutilized ITC from one period can be carried forward and adjusted against future tax liabilities, ensuring compliance with GST claim rules.
    • Is ITC available on services like transportation and freight charges?
      Yes, ITC is available on transportation and freight charges, provided they are directly related to business operations and proper GST invoices are maintained.
    • Can ITC be claimed on goods lost, stolen, or damaged?
      No, ITC cannot be claimed on goods that are lost, stolen, or damaged. Such goods are specifically excluded from ITC eligibility under GST law.
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