Input Tax Credit – Meaning, Eligibility and how to claim ITC
Input tax credit under GST
- Introduction to ITC
- How to Calculate Input Tax Credit under GST
- Who can claim ITC?
- How to claim ITC?
- How can Input Tax Credit be used?
- Documents required to claim ITC
- Reversal of ITC
- Reconciliation
- Time limit for availing ITC
Introduction to Input Tax Credit
Meaning of Input Tax
When a registered person pays tax on supply of goods or services or both, then the tax is called Input Tax. The taxes include Central Tax, State Tax, Integrated Tax, Union Territory Tax and taxes paid on a reverse charge basis.
Meaning of Input Tax Credit
- It refers to claiming the credit on the taxes that have been paid on inputs. Commonly, we also refer to it as ‘ITC’.
- Claiming this credit helps in the reduction of output liability (the liability that arises on the supply of goods and services (sale) of the registered person.
- The scope of Input Tax Credit has been widened due to the enactment of the GST Law, in comparison to the other existing laws.
- For e.g. in the pre GST era, when interstate sales were made, the seller could not take the credit on central sales tax levied. Hence it would be a part of the cost of the product. Whereas, in GST the credit on interstate sales can be claimed as a credit.
- The process of reducing the taxes is through a mechanism called ‘set-off’.
- During the pre- GST era there were no Cross credits on the VAT, Service tax, Excise, Central Sales Tax and other taxes and levies. Since GST is a unified tax system, one of its major features is that there will be a seamless flow of credit.
- Hence, there is a benefit of claiming cross credits resulting in the reduction of the tax liabilities and consequently, the cost of the goods.
Key Terms under ITC in GST
Input: Input means any goods other than capital goods used or intended to be used by a supplier in the course or development of the business.
Input Service: In short, Input service means any service used or intended to be used by a supplier in the course or development of the business.
Electronic Credit Ledger: It is similar to a passbook which contains all the credits you have accumulated and maintained on the common portal.
Electronic Cash Ledger: It is similar to a passbook which contains all the taxes you have paid on the supplies. even so, It is maintained at the common portal for each taxable person registered under GST.
How to Calculate Input Tax Credit under GST
Mr. India provides services to the client for Rs.5,00,000/- on which GST is charged at 18% amounting to Rs.90,000/-. Additionally, he has incurred the following expenses:
PARTICULARS | EXPENSES (RS.) | GST (RS.) |
Office Rent | 40,000/- | 7,200/- |
Telephone Bill | 1,000/- | 180/- |
The concept of ITC works on the model of ‘set off’. Set off refers to availing credit on the supply of goods and services that have been made to Mr. India. In this case, Rs.7,200 and Rs.180 on the office rent and telephone bill respectively can be claimed as credit by Mr. India. Also, it can be used to reduce his tax liability on the services that have been supplied by him.
Utilisation of ITC
PARTICULARS | GST (RS.) |
Output GST liability on services to client | 90,000 |
Less: Input GST on Office rent | (7,200) |
Less: Input GST on Telephone bill | (180) |
Balance amount to be remitted to the Government | 80,620 |
Who can claim ITC ?
A GST-registered person can only claim ITCs if he meets each of the conditions below :
- The dealer must have a tax invoice on hand.
- The said goods/services have been received.
- Returns were submitted.
- The supplier has already submitted the tax to the government.
- If goods are received in installments, ITC can only be claimed when the last lot is received.
- Generally, An ITC will not be allowed if depreciation has been claimed on a capital good’s tax component.
Overall, An individual enrolled under the GST composition scheme cannot make an ITC claim.
How to claim input tax credit?
Eligibility for claiming ITC
For this purpose, Every registered person is entitled to take credit of input tax charged on any supply of goods or services to you which are used or intended to be used in the course or furtherance of your business.
Conditions for claiming ITC
How can Input Tax Credit be used?
ITC from CGST, SGST, and IGST can be used to pay the other taxes only in an advised manner. i.e.,
- When ITC is received from CGST
- First priority is to pay CGST.
- The remaining amount can be used to pay IGST.
- ITC from CGST cannot be used to pay SGST.
- When ITC is received from SGST
- First preference is to pay SGST.
- The remaining amount can be used to pay IGST.
- ITC from SGST cannot be used to pay CGST.
- When ITC is received from IGST
- At First, priority is for the payment of IGST.
- The second priority is to pay CGST.
- If remaining, it can also be used for the payment of SGST.
Documents required to claim ITC
- Tax Invoice issued by the supplier
- The debit note issued by the supplier to the recipient in case of taxable value or tax payable mentioned in the invoice is less than the taxable value or tax payable on such supply of goods and services or both.
- Bill of entry
- Invoice prepared in respect of reverse charge basis or bill of supply issued instead of tax invoice if the amount is less than Rs 200.
- Document issued by Input Service Distributor for distribution of credit as per the invoice rules under GST.
Lastly, Bill of supply issued by the supplier of goods and services or both
Reversal of Input tax Credit (ITC)
Under the following conditions, input tax credits may be reversed:
- In case of failure to pay a supplier within 180 days of receiving an invoice
- Then Inputs or capital goods used for personal purposes
- The goods and services used to produce or supply exempt goods and services
- Input tax credit claimed on the sale of capital goods or plant and machinery
- Also, the input service distributor has provided a credit note
- Supplies that are not permitted under Section 17(5) of the Act
- From registered regular dealer to composite dealer transition
Where input tax credit (ITC) is reversed
- In the month in which it is reversed, the amount may be added to the production tax liability.
- Interest must be charged from the time credit is requested until the money is repaid.
- However, It shall not be possible to reclaim reversed credit within a limited period of time.
Reconciliation of ITC
So to claim ITCs, a person must match the details specified by his supplier in his GST filing. At this point, If there is a mismatch the supplier and recipient will be informed of discrepancies after the filing of GSTR-3B.
Time limit for availing ITC
As per Sec 16 of the CGST Act, 2017 Input Tax Credit on invoices/debit notes pertaining to a financial year can be availed any time till earliest of the following:
- Due date of filing the return for the month of September of the succeeding financial year i.e., 20th October
- Date of filing the annual return i.e., 31st December of the succeeding financial year.
In the meantime, no change in the return will be permitted after September of the next financial year. This is the reason for the restriction.
However, if the annual return is filed prior to the due date of the return for the month of September of the succeeding year, then no change can be made after filing the annual return.
Note: Invoices are raised whenever there is a purchase or sale transaction with a consideration. When the consideration falls short due to certain anomalies or extra goods being delivered to the purchaser then the seller shall issue a debit note. Hence, they are issued in circumstances where the taxable value of the goods undergoes changes.
This ends our post on ITC. Also, let us know your opinion by commenting below.
