Who Can Claim ITC in India

What is Input Tax Credit?

The tax a person already paid when purchasing goods or services is eligible as a deduction from the tax due from the sale of goods, and services is referred to as an input tax credit.

For instance, a merchant might buy goods for Rs. 100 and pay 10% GST, taking the total purchase price up to Rs. 110. The dealer then sells the goods for Rs. 150 while charging the customer Rs. 15 as GST. Hence, the dealer has received Rs. 165 for this transaction. The total GST due on this product is Rs. 15. However, since the merchant had already paid Rs. 10 as GST while purchasing the goods, he is eligible to claim Rs. 10 as Input Tax Credit. Therefore, the merchant is now liable to pay only Rs. 5 as further GST on this product (Rs. 15 total GST due – Rs. 10 GST already paid).

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 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 Claim ITC?

Every regular taxpayer is required to include the amount in GSTR 3B. Up to 20% of the allowable input tax credit that the supplier reports in the automatically generated GSTR 2A return may be claimed by the taxpayer in GSTR 3B on a provisional basis. Before moving further with GSTR 3B, the taxpayer must double-check the GSTR 2A data and resolve any mismatch in numbers. This process is known as the reconciliation of ITC.

A taxpayer was allowed to claim any amount of the provisional input tax credit before October 9, 2019. The Provisional input tax credit is limited to 20% of the Eligible ITC available in GSTR 2A, according to CBIC’s notification, which is effective as of October 9, 2019.

This makes it crucial to match the purchase register with the GSTR 2A as the amount of input tax credit recorded in GSTR 3B will be the sum of the actual input tax credit in the GSTR 2A and the provisional input tax credit, which is equal to 20% of the actual valid input tax credit in the GSTR 2A.

Reversal of ITC

In some circumstances, the input tax credit previously claimed must be reversed upon the occurrence of specific events. The reverse could be due to occurrences like the usage of capital goods for non-business purposes, items that were later lost or distributed as free samples, or excess credit that was previously claimed. Some of these products might also spark interest in addition to reversal.

Reversing an input tax credit means that the amount is added to the taxpayer’s output tax liability from the reporting standpoint. Nearly all input tax credit reversal instances involve the taxpayer’s internal records and procedures, making them impossible to determine solely based on GSTR 2A data.

Situations where ITC can be Reversed

• They fail to pay the supplier 180 days after the invoice’s due date.
• The items and services are employed for private consumption, whether inputs or capital assets.
• The products and services used to create or provide the exempt products or services.
• Sale of equipment or capital items for which an input tax credit was claimed.
• The input service distributor is the one who issues the credit notes.
• The Act’s section 17(5) does not permit the supplies.
• The input tax credit is reversed when a registered regular taxpayer becomes a composite taxpayer.
• Interest must be paid from the day the credit is used until the date the amount is reversed and paid.
• Recovering the reversed credit is not subject to any time restrictions.

Availing ITC on Reverse Charge

Reverse charge transactions allow the recipient to deposit the tax and then claim it as an Input Tax Credit, unlike forwarding charge transactions, where the supplier must pay the tax before the recipient may claim it. Additionally, the interim ITC rule governing 10% input tax credits does not apply to reverse charge transactions. Due to this, it may be the only Input Tax Credit that is entirely in your control.

If the following requirements are met, an input tax credit may be claimed when tax is paid using the reverse charge mechanism in the same month the payment is made.

• Cash has been used to pay off the debt.
• The products or services were utilised for commercial purposes.
• Since an unregistered provider cannot produce a tax invoice, the purchases are self-invoiced.

Conclusion

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