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Input Tax Credit Under GST

Input Tax Credit Under GST (2023 Guide)

Input Tax Credit under GST is the cornerstone. The fundamental reason why GST is beneficial is the seamless flow of credit across the supply chain from the manufacturer of the goods to the end user. ITC is claimable on a wide range of business expenses, including raw materials, components, packaging, fuel, and many other types of inputs.

What is ITC in GST?

As per section 2(63), input tax credit means credit of the input tax. An input tax credit is tax already payable by an individual when purchasing goods or services and is available as a credit against the amount of tax payable.

Under the Goods and Services Tax System, the ITC is available to registered taxable persons for inputs used or intended to be used for business purposes. Similarly, ITC is available for capital goods for business.

For example, suppose a manufacturer purchases a good worth Rs 2000 and pays a 10% tax on it. And now, this trader is selling such goods for Rs. 2500 and collecting a tax of Rs. 250 from the buyer. Now the trader has to pay Rs. 250 to the government, but he has already paid Rs. 200, so this Rs. 200 is the trader’s ITC and will be allowed as a deduction from tax payable, leaving him with a net tax of Rs. 50.

What is the rule of the input tax credit? 

No registered person shall be eligible to claim input tax credit unless it satisfies specific rules.

  • Buyer must have a valid tax invoice, direct debit, or other required documentation issued by a registered dealer.
  • Buyer must have received goods or services. If the product was purchased in installments, the credit can be claimed on the final installment tax invoice.
  • Suppliers must pay to the state any taxes imposed on the purchaser’s purchases in cash or by claiming tax credits.
  • You can claim an input tax credit on your purchases only if your supplier is GST compliant and has paid the tax they had collected from you.
  • To claim ITC, the Buyer must pay the Supplier for the supplies received (including taxes) within 180 days from the date of issuance of the invoice. If the buyer does not do this, the amount of credit would be added to their output tax liability.
  • ITC can be claimed once the buyer has paid the amount owed by the taxpayer to the supplier. For partial payments, you can claim a proportionate credit.

Who is eligible for ITC in GST?

The following persons are eligible to claim ITC in GST.

  • ITCs used for business purposes are declared eligible ITCs, and ITCs used for other purposes cannot be claimed as ITCs, except for blocked credits that are expressly provided separately.
  • ITC eligibility is based on whether they are used for taxable or non-taxable supplies.
  • Proportionate credit is allowed when a good or service is used to make both taxable and exempt supplies.
  • Only registered persons are eligible for taxable supplies.
  • Zero-rate supplies are taxable supplies and any goods or services used to provide such outward supplies are tax deductible.

Where is ITC applicable?

Here are a few cases where ITC is applicable.

  • When goods or services are used for both business and non-business purposes, ITC can be claimed only on the business-related inputs.
  • When goods/services are used to make both taxable and exempt supplies, ITC can be claimed only on the inputs used to make taxable and zero-rated supplies.
  • A taxpayer who switches from the composition scheme to the regular scheme may claim ITC on the following:

Stock purchases (semi-finished/finished goods)

Capital Goods held as composition dealer until the last day

  • Once an exempt supply of goods/services becomes taxable, the ITC will apply to the stocks (semi-finished/finished goods) forming part of the exempt supply. 
  • ITC applies to capital goods used only for exempt supplies.
  • When using a vehicle with 13 or more seats (including the driver’s seat) for passenger transport.
  • If the vehicle is used to transport cash for financial institutions.
  • Certain creditable services such as insurance, vehicle, vessel, and aircraft repair or maintenance.
  • Goods or services that an employer is legally required to provide to its employees.

What is ineligible ITC?

Under the GST, certain goods and services are not eligible for the ITC. Certain ineligible items in Section 17(5) of the Act are not claimable for GST.

(a) motor vehicles and other modes of transportation, except when used

(i) for making the taxable supplies listed below, namely

(A) additional supplies of such vehicles or conveyances.

(B) passenger transportation

(C ) offering schooling on driving, flying, and navigating such motors or conveyances;

(ii) for goods transportation

(b) provision of goods and services, namely,

(i) meals and beverages, out-of-doors catering, splendor treatment, fitness offerings, beauty, and plastic surgical procedures wherein such inward delivery of products or offerings of a specific class are utilized by a registered taxable individual for making an outward taxable delivery of the identical class of products or offerings.

(ii) membership in a club, fitness, and health center.

(iii) rent-a-cab, existence insurance, medical health insurance besides wherein the Government notifies the offerings which might be compulsory for an organization to offer to its employees under any regulation in the interim in pressure or such inward deliver of products or offerings or each of a specific class is utilized by a registered individual for making an outward taxable deliver of the identical class of products or offerings or each or as a part of a taxable composite or combined deliver.

(iv) travel benefits provided to vacationing employees, such as leave or home travel concessions.

(c) works contract services provided for the construction of immovable property, excluding plant and machinery unless they are input services for future deliveries of works contract services.

(d) items or offerings obtained through a taxable individual for the construction of immovable assets on his very own account, apart from plant and machinery, even if utilized in the path or furtherance of business.

e) goods and/or services on which tax was payable under the composition scheme

f) personal consumption goods and/or services

(g) items lost, stolen, destroyed, written off, or disposed of through manner of present or unfastened samples

(h) any tax paid under sections 74, 129, or 130.

How is ITC calculated in GST with example?

 The ITC is calculated based on the eligible inputs used in the seller’s production process. Here is a quick review of the steps to calculate ITC.

  • Calculate the tax credit you are entitled to claim for eligible goods or services
  • Determine the level of utilization.
  • Determine the final GST payable on the finished goods or services.
  •   Claim the available ITC

The GST input tax credit formula would be as follows: –

  GST payable = Output GST (GST on the sale of finished goods) – Input GST ( GST on purchased raw material)

Let’s see an example

Mr. Karan purchased goods worth Rs. 50,000 on which GST @ 18% was Rs. 9000.

He sold goods worth Rs. 55,000. GST payable @ 18% is Rs. 9900.

Let us calculate and understand net GST payable and GST input credit.

Outward GST payable               –    Rs.  9900

Less- GST paid on purchases   –    Rs.  9000

Thus, net GST payable in cash is Rs. 900

From above, we understand that Rs 9000 reduced is the input tax credit availed that had been paid on purchases.

What is the maximum time limit for an input tax credit?

A person cannot claim an input tax credit on an invoice or debit note for the supply of goods, services, or both after

  • Due date of furnishing return u/s 39 for September of next financial year, or
  • Actual date of furnishing the relevant annual return in form GSTR-9

 Whichever is earlier

Frequently Asked Questions (FAQs)

What if I forgot to claim ITC?

The taxpayer can claim the missed ITC from the previous financial year in the current financial year. Missing claim ITC is claimed by filing form GStR-3B, then reporting it in form GSTR-9.

Can we claim ITC after 6 months?

Yes, you can claim ITC after 6 months. Only tax invoices and debit notes less than a year old are eligible for ITC.

Can I claim ITC after the due date?

You cannot claim GST after the due date.

Can we claim 5% GST?

If the claimant pays tax at a GST rate of 5%, no input tax credit will be given for the goods or services received.

Can I take ITC as per GSTR2A?

No, you cannot take ITC as per GSTR 2A. Buyer may only claim ITC as set forth in GSTR-2B under Section 16(2) (aa) of the CGST Act.

Wrapping Up

A resident of India who sells goods and services in the country can claim an input tax credit (ITC) under the new Goods and Services Tax (GST). To claim the ITC, the seller must provide the appropriate documentation to the tax authority. This documentation includes proof of purchase of the eligible inputs, invoices, and other relevant documents.

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