Goods and Services Tax (GST) is considered as 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.
In this article, we’ll cover all you need to know about Input Tax Credit (ITC) under GST, time limit to avail ITC, how to calculate Input Tax Credit, how to claim ITC, situation where you can not avail ITC and much more.
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 are 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.
During pre-GST era, cross-credit of VAT against service tax/excise or vice versa was not allowed. But under GST, since these taxes will be subsumed into one tax, there will not be restriction of setting off this input tax credit.
The conditions to claim Input Tax Credit under GST is a very critical activity for every business to settle the tax liability.
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.
Say for instance that you are a manufacturer. The tax to be paid on the final product is INR 450. The purchase tax paid is INR 300. The input credit you claim is INR 300, and the final taxes you will pay is INR 150.
What is the time limit to avail GST ITC?
ITC can be availed by a registered taxable person in a specific manner and within a specified time frame. The table below shows the different situations wherein the inputs can be claimed for semi-finished goods or stock or finished goods.
|Situation||ITC claims day for semi-furnished goods/stock/finished goods (held on immediate preceding day)|
|If a person has applied for registration or is liable to register or is granted registration||Day from when he is liable to pay taxes|
|When a person takes voluntary registration||Registration day|
|When a taxable registered person stops paying taxes in composition levy scheme||Day from when he is liable to pay tax normally u/s 7.|
Input tax credit for the above-mentioned situations can be claimed only if it does not exceed one year from the tax invoice date of issue related to supply.
For any other cases, ITC must be claimed:
- Before you file a valid return for the September month u/s 27 days after the end of financial year to which the invoice is related, or
- Before you file the annual return, as u/s 30 days, the due date to file the annual return is December 31 after the end of the financial year.
How to calculate Input Tax Credit?
Let’s consider an example on how to calculate Input Tax Credit:
Suppose you have a business. The service or product you sell attracts a tax of 18%. You use input services or goods during your business. The tax due from you (of 18%) can be adjusted to the taxes paid already by you on the purchase of such inputs. The manufacturers add taxes only for the value addition done and not on the total product value.
Let’s consider an example of a steel utensils manufacturer who manufactures utensils like spoons, plates, etc. Assume that the manufacturer had bought an INR 500 worth raw steel to make a pressure cooker and INR 100 worth other raw materials. Let’s assume that the GST for steel is 18%. Also, assume that the GST he paid is 28% of other raw materials.
Hence, the manufacturer has paid Rs. 28 on other raw materials and Rs. 90 on raw steel which he used as inputs.
So, the total input tax paid was INR 118 by the manufacturer.
Now, after considering the cost of manufacturing steel pressure cooker using the raw materials and including a decent profit, he decided to sell the pressure cooker to a distributor at INR 800 + GST.
Assume that the steel utensil attracts a GST of 18%.
Now the tax on it will be INR 144. So the manufacturer will invoice the pressure cooker for INR 944.
Hence, the manufacturer is collecting INR 144 as GST on sale from the distributor. The manufacturer had paid INR 118 towards GST during the purchase of his input raw materials. Hence, out of INR 144 of GST, the manufacturer can now claim a credit of INR 118 which he already paid towards GST for inputs and deposit the difference of INR 26 with the government.
This tax credit is available at all succeeding stages, retailers and distributors charge GST and can claim the Input Tax Credit.
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:
- One must be a registered taxable person.
- One can claim Input Tax Credit only if the goods and services received is used for business purposes.
- Input Tax Credit can be claimed on exports/zero rated supplies and are taxable.
- 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.
- 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.
- Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
- If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
- The Input Tax should be paid through Electronic Credit/Cash ledger.
- All GST returns u/s 27 such as GST-1, 2, 2A, 6, 6A, 7, 7A needs to be filed
- During bulk receipt of goods, one can claim Input Tax Credit only once the final lot is received.
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:
- A uploads all his tax invoices details as issued in GSTR-1.
- 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.
- The details of thesale 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.
Under what situations one CAN NOT claim Input Tax Credit (ITC)?
Input Tax Credit (ITC) is unavailable for claim u/s 16(9) under the following circumstances:
- If goods and services are acquired for personal use.
- In thecase of goods and services acquisition on acontract which may result in areduction of immovable property apart from plant & machinery.
- If one has paid tax in GST composition scheme for goods and services received.
- In case an immovable property is built apart from plant and machinery using the goods and services and this immovable property is not transferred.
- In thecase where employees have used the goods and services for personal purposes.
- When thecost of capital goods depreciation is claimed, then Input Tax Credit cannot be claimed.
What are the documents and forms required to claim Input Tax Credit?
Each applicant will require the following documents to claim Input Tax Credit under GST:
- Supplier issued invoice for supplying the services and goods or both according to GST law.
- A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
- Bill of entry.
- A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules.
- An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law.
- A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.
The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request.
For taxes paid on goods and services or both due to any fraud or due to order for the demand raised, suppression of facts or wilful misstatement, Input Tax Credit cannot be claimed.
Since input credit will be available to the seller at each stage, the input tax credit is expected to bring down the overall taxes charged on the product at present. So, if input credit mechanism works efficiently, final consumers may see cost reduction.