Input Tax Credit (ITC)

Table of Contents

Goods and Services Tax (GST) is considered the biggest reforms in India. However, one thing that has become the talking point is the mechanism of input credit under GST.

In simple words, Input Credit means at the time of paying tax on sales, you can reduce the tax you have already paid on purchases.

What is Input Tax Credit (ITC)?

Input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.

The concept is not entirely new as it already existed under the pre-GST indirect taxes regime (service tax, VAT and excise duty). Now its scope has been widened under GST. Earlier, it was not possible to claim input tax credit for Central Sales Tax, Entry Tax, Luxury Tax and other taxes. In addition, manufacturers and service providers could not claim the Central Excise duty.

Input Tax Credit can’t be applied to all type of inputs, each state or a country can have different rules and regulations. Input Tax Credit is also viable to a dealer who has purchased good to resale. Tax Credit is the backbone of GST and for registered persons is a major matter of concern. This is majorly in line with the pre-GST regime. These rules are quite stringent and particular in their approach.

Documents on which Input Tax Credit may be claimed

A registered dealer can claim input tax credit on the basis of following documents:

  1. A tax invoice issued by registered supplier
  2. A debit note issued in respect of earlier issued tax invoice by the registered supplier.
  3. An invoice issued by the recipient of goods or services who has paid tax under reverse charge mechanism
  4. A bill of entry or similar document in case of imports.
  5. An invoice or credit note issued by an Input Service Distributor.

Input Tax Credit of CGST/ SGST/ UTGST/ IGST

GST comprises of the following levies:-

  1. Central Goods and Services Tax (CGST) [also known as Central Tax] which is levied on intra-state or intra-union territory on supply of goods or services or both.
  2. State Goods and Services Tax (SGST) [also known as State Tax] which is levied on supply of goods or services or both within the same state.
  3. Union Territory Goods and Services Tax(UTGST) [also known as Union Territory Tax] which is levied on supply of goods or services within the same union territory.
  4. Integrated Goods & Services Tax (IGST) [also known as Integrated Tax) on inter-state supply of goods or services of both.

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfills ALL the conditions as prescribed.

a. The dealer should be in possession of tax invoice

b. The said goods/services have been received

c. Returns have been filed.

d. The tax charged has been paid to the government by the supplier.

e. When goods are received in installments ITC can be claimed only when the last lot is received.

f. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

How to claim Input Tax Credit (ITC)?

The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:

  1. One must be a registered taxable person.
  2. One can claim Input Tax Credit only if the goods and services received is used for business purposes.
  3. Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
  4. For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
  5. One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
  6. Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
  7. If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
  8. The Input Tax should be paid through Electronic Credit/Cash ledger.
  9. All GST returns such as GST-1, 2,3, 6, and 7 needs to be filed

How Input Tax Works Under GST

Suppose Mr. A is a seller. He sells goods to Mr. B. The buyer Mr. B is now eligible to claim the purchase credit using his purchase invoices.

This is how it works

  1. A uploads all his tax invoices details as issued in GSTR-1.
  2. The details uploaded by Mr. A is automatically populated or reflected in GSTR-2A. This same data will get reflected when Mr. B files the GSTR-2 returns which are nothing but the details of his purchase.
  3. The details of the sale are then accepted and acknowledged for by Mr. B, and subsequently, the purchase tax is credited to Mr. B’s ‘Electronic Credit ‘ He can use this to adjust it later for future output tax liability and receive a refund.

How to utilize the Input Tax Credit?

In GST we have three types of taxes CGST, IGST, and SGST/UTGST.
For the inter-state supply of goods/ services, IGST is charged. And for the intra-state supply of goods/services CGST and SGST/UTGST are charged.

While making payment for the above taxes, input tax credit will be allowed in the following manner-

Credit 1st to be utilized for payment of Balance if any

Basic Requisites / Conditions for Claiming Input Tax Credit (ITC)

The following requisites are mandatory for claiming input tax credit under GST

  1. One must be registered under GST Law
  2. A tax invoice or debit note issued by the registered supplier showing the tax amount
  3. Goods or services must have been received
  4. Supplier should have filed returns and paid such tax thereon to the government
  5. Where goods are received in parts or in installments, ITC maybe claimed on receipt of last lot or installment.
  6. Where input tax credit is included in the cost of capital goods and depreciation on such tax is claimed, no input tax credit is allowed.
  7. Input tax credit will not be allowed if the same has not been claimed within the prescribed time limit.