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The Goods and Services Tax (GST) is a major reform in India. However, the GST’s input credit mechanism has become a topic of conversation. Simply put, input credit means that when you pay sales tax, you can reduce tax on purchases you have already paid for. In this article, we’ll go over everything you need to know about Input Tax Credit under GST with Examples and more.

How is input tax credit calculated with an example?

A tax invoice or debit note issued by a registered trader is a must to claim the input tax credit. Secondly, the goods and services must be received and taxable purchases must be deposited or paid by the supplier to government authorities in cash or by claiming input tax credits.

Let’s look at an example of calculating the input tax credit.

Example 1: 

Mr. Chirag purchases processed and cotton material worth INR 50,000 at 5% GST (total cost paid- 52500 including GST) for his Silk business.

Because Mr. Chirag is using the material for his business, he can claim an INR 2500 credit by mentioning it in their GSTR 3B Return and adjusting it with his outward tax liability to reduce it.

Then he sells finished goods at a tax rate of 12% at a rate of INR 80,000 and his total tax liability in the same tax period is INR 9,600.

Since he has already paid his input tax of INR 2500, for that tax period he can use the credit to reduce his outward tax while paying his tax liability when filing his GSTR-3B.

He only has to pay an adjusted tax liability of INR 7100.

Solution:

The supplier who sold to Mr. Chirag will declare the specifics of the sale in their GSTR-1 filing.

The details provided by the supplier in his GSTR-1 are reflected in his GSTR-2A and his GSTR-2 filed by Mr. Chirag for this tax period.

Mr. Chirag then used his GSTR-2A and GSTR-2 to file his GSTR-3B  where he calculates his actual tax liability, the input tax credit under GSTR-2A, and the final adjusted tax liability payable.

Example 2: 

Consider the case of a steel utensil manufacturer who produces utensils such as spoons, plates, and so on.

Assume the manufacturer spent INR 5000 on raw steel and INR 1000 on other raw materials to make a pressure cooker.

Let us suppose the steel GST is 18%. Assume that the GST he paid is 28% of the cost of other raw materials.

Thus, the manufacturer had to pay Rs. 280 for other raw materials and Rs. 900  for the raw steel he used.

The manufacturer has to pay a total of INR 1,180 in input tax.

Considering the cost of using raw materials to produce a steel pressure cooker and making a modest profit, he decided to sell the pressure cooker to a merchant for 8000 INR + GST.

Assume that the 18% GST applies to the steel item.

The tax on this will be 1,440 INR. So the manufacturer charges 9,440 INR for the pressure cooker.

So the manufacturer collects 1,440 INR as GST from dealers on sale.

Manufacturers had to pay INR 1,180 to GST when purchasing input materials.

The manufacturer can now deduct INR 1,440 from the INR 1,180 GST that he already paid as input tax and deposit the INR 260 difference with the government in place of the INR 1,180.

This tax credit is available for all subsequent stages. Retailers and distributors can calculate GST and claim input tax credits.

ITC On Capital goods

In the first year of purchases, 100% of the credit is available.

ITC is not allowable if depreciation is on the GST credit portion of capital goods.

Example:

CostGSTTotal costDeprecation Charged OnITC Available
20008002,8002,800nil
20009952,9951,0051,990

What is the Rules 42 & 43 in GST?

Rule 42 is with reference to Section 17 (1) and section 17 (2).

Section 17 (1): credit for goods or services or both used partly for business and partly for other purposes is for input tax attributable to business purposes.

Section 17 (2): The registered person uses goods or services, or both:

  • partly for taxable supplies, including zero-rated supplies, and
  • partly for exempt supplies.

 Rule 42 describes the manner to determine the proportion of ITC which would be eligible that is which is attributable to the taxable supplies including zero-rated supplies.

Businesses should first separate the non-claimable individual credits from the total ITC as follows:

Ttotal input tax on import and input service
T1input tax attributable to the inputs and input services intended to be used exclusively for the purpose other than for business
T2Input tax on inputs and input services intended solely for the purpose of effecting exempt supplies
T3restricted credit under section 17 (5) of the CGST Act 2017
C1ITC credit to Electronic credit ledger [C1 =T-(T1+T2+T3)]
T4ITC attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempt supplies but including zero-rated supplies
C2common credit [C2= C1-T4] 

Common credit computer under D1 and D2 

The role provides a formula to compute the restricted credit on the basis of the exempt turnover percentage

D1= (E-F) x C2

E- Is the total value of exempt supplies during the taxable period

F-  is the total turnover of a person in the state during the tax year.

D2= 5% of C2

Common credit for taxable and zero-rated supplies

C3= C2 – ( D1 + D2 )

D1 and D2 are the ITCs that is reversible.

Illustration:

  Supplies made by an ABC manufacturing company in August 2022 to XYZ Company in Delhi.

Total ITC available (T) Rs. 2,00,000
ITC on inputs/supplies used for personal purposes by the business owner (T1)Rs. 15,000
ITC related to exempt inputs/supplies (T2)Rs. 20,000
Blocked credits (e.g. GST payments for used transportation services) (T3)Rs. 8,000
Input Tax credit exclusively for taxable supplies (T4)Rs. 1,25,000
The total value of all exempt supplies made in August (E)Rs. 3,50,000
Total turnover (F)Rs. 50,00,00

Solution: 

C1 = T – (T1+T2+T3)

C1 = 2,00,000 – ( 15,000 + 20,000 + 8,000 ) 

Therefore, C1 = 1,57,000

The common credit: C2 = C1 – T4, 

C2 = 1,57,000-1,25,000 

Therefore, C2 = 32,000

D1 = (E÷F) × C2 

D1 = (3,50,000 ÷ 50,00,000) × 32,000 

Therefore, D1 = 2,240

D2 = 5% of C2, 

Therefore, D2 = 1,600

C3 = C2 – (D1 + D2)

Therefore, C3 = 32000 – ( 2,240 + 1,660 ) = 28,100 

So, out of the original ITC of Rs. 2,00,000, only C3 (Rs. 28,100) and T4 (Rs. 1,25,000) were credited to the electronic credit ledger. D1 (Rs. 2,240) and D2 (Rs. 1,660 ) were required to be reversed.

Rule 43 applies to capital goods.

The first step is to see if the ITC meets any of the following criteria:

ITC applies to capital items used solely for non-business or exempt outgoing deliveries.

OR

ITCs are available for capital goods usable exclusively to manufacture non-exempt supplies.

The life of capital goods is 5 years from the date of invoice of such goods.

If a capital good was originally used or intended to be used for exempt supplies and then used partly for taxable supplies 

Before 01/04/2020 – The amount of IPC is to lower by 5% for every quarter or part thereof and the balance amount is the common credit.

W.e.f 01/04/2020-  Entire amount of tax chargeable in an invoice is common credit. An amount equal to 5% for every quarter or part thereof, where registered capital goods were not eligible for ITC, shall be added to an output tax liability for which credit is claimed during the tax period.

Tc – The total amount of input tax paid on capital goods that are commonly used.

Tm = Tc ÷ 60 –  input tax credit attributable to a tax period

Tr-  aggregate of Tm of all goods

Te = (E ÷ F) × Tr

E= Aggregate carpet area of apartments exempt from tax plus aggregate carpet area of apartments not exempt from tax but are identified by the promoter to be sold after the issue of completion certificate a first occupation whichever is earlier

F= Total carpet area of the project’s apartments

The amount of common credit attributable to exempt supplies (Te final ) shall be calculated finally

the entire period from the commencement of the project on 1st July 2017 whichever is later to the completion of the first occupation of the project whichever is earlier for each project is separately furnishing the return for September following the end of the financial year in which the completion certificate is issued for the first occupation taking place of the project. 

What is the 35% option in GST?

The fixed sum method requires the taxpayer to pay a tax amount equal to 35% of the tax amount specified in the pre-filled challan on form GST PMT-06.

If the report is filed quarterly, 35% of the tax liability paid from the previous quarter’s GSTR-3B cash ledger shall be automatically entered which must be paid.

If the return is filed monthly, 100% of the tax liability paid from his GSTR 3B return cash ledger for the previous month must be automatically populated which must be paid.

When a taxpayer uses the 35%challan option, no interest will be charged if the payment is made by the 25th of the following month.

Frequently Asked Questions(FAQs)

Can we claim 100% ITC on capital goods?

Capital goods used exclusively for business purposes are eligible for ITC.

Can I claim GST on food?

ITCs can be claimed for food and beverages if employers are legally bound to provide them to their employees.

Can I take ITC on a laptop?

Yes, you can claim ITC if a laptop is purchased from a GST-registered retailer and a tax invoice is received.

Can we claim ITC on hotel bills?

Yes, you can claim ITC on hotel bills (only stay, no food expenses) if your GST registration is in the same state.

Can I claim ITC on a TV purchase?

Yes, if your GSTIN is mentioned on the invoice TV then you can claim the ITC.

Can we claim ITC on printing?

Yes, you can claim ITC on printing used for commercial purposes.

Can a salaried person claim GST?

No,  a salaried person cannot claim GST.

Can we claim GST on gold purchases?

If you are a registered jeweler, you can claim a 2% input tax credit on jewelry-making charges.

Wrapping UP

A taxpayer must comply with the conditions to avail of ITC. Taxpayers must pay input tax or tax in cash as defined in section 41 of the GST Act. Return must be filed under section  39 of the GST Act. To claim ITC, contact our experts at InstaFiling.

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