Input Tax Credit

In India, the Goods and Services Tax (GST) applies not only to final products but also to the raw materials and services used by manufacturers and suppliers to create these products. Furthermore, when these finished goods are supplied to the consumer, they are again taxed under GST at the prescribed rate. This can lead to double taxation, potentially raising prices for consumers. To mitigate the risk of double taxation, the GST framework incorporates the input tax credit (ITC) concept. Continue reading to learn about the definition of the input tax credit, eligibility criteria for claiming ITC required documents, and how to claim the input tax credit.

What is an Input Tax Credit?

Input Tax Credit (ITC) in the GST framework is a mechanism that allows registered businesses to claim a credit for the taxes paid on their purchases. This credit can then be used to offset the GST they owe on their sales. This effectively lowers their overall tax burden and prevents double taxation. For instance, if a business pays taxes on raw materials like flour, sugar, and chocolate chips needed to bake cookies, ITC allows them to deduct these taxes from the GST collected when the cookies are sold. The formula for calculating Net GST liability is: Net GST Liability = Total GST Liability at the time of sale – Input Tax Credit. This system not only helps businesses save money but also ensures the tax system is fairer by preventing taxes from accumulating and escalating prices.

Objective of the Input Tax Credit Mechanism

The primary purpose of the Input Tax Credit (ITC) mechanism is to lessen registered entities' GST liability when they make supplies to their customers. This system aims to alleviate the tax load on individual businesses and minimize the risk of double taxation.

Eligibility Criteria for Claiming Input Tax Credit under GST

To qualify for the Input Tax Credit (ITC) under GST, specific criteria must be met:

The entity must be registered under GST to claim ITC benefits.
The GST paid should be evident on the invoice issued by the registered supplier.
A confirmation of the receipt of goods or services, including the final shipment if there are multiple shipments, must be provided.
The supplier, who is registered under GST, must have paid the due GST to the tax authorities and filed the required GST tax returns.
The ITC must not be claimed on goods that have already been included in the cost of capital goods, nor should there have been any depreciation claimed on the tax component of such capital goods.
The claim for input tax credit should be made within the specified time limit set under GST regulations.

Ineligible Input Tax Credits Under GST

Not all input tax credits can be claimed under GST; certain credits are either blocked or restricted according to GST regulations. Here are examples of input tax credits that are ineligible:

GST is paid on motor vehicles and other conveyances unless they are used for specified purposes, such as transporting goods and passengers or imparting training.
GST on food and beverages, outdoor catering, beauty treatments, health services, cosmetic and plastic surgery, except when these services are used to make an outward taxable supply in the same category or as part of a mixed or composite supply.
GST on membership fees for clubs, health, and fitness centres.
GST on travel benefits provided to employees for vacation, such as leave or home travel concession.
GST on goods or services received by a non-resident taxable person, except those on which interstate Goods and Services Tax (IGST) is applicable.
GST on goods or services used for personal consumption by the registered person or their employees.
GST on goods that are lost, stolen, destroyed, written off, or disposed of by gift or as free samples.

Deadline for Claiming Input Tax Credit

The deadline for claiming input tax credit under GST is defined in Section 16(4) of the CGST Act, 2017. This time limit was revised effective from 1st October 2022. According to the updated provision, the last date to claim ITC under GST is whichever comes earlier:

The 30th of November following the end of the relevant financial year or
The date of filing the annual GST return using Form GSTR 9.

Therefore, for the financial year ending on 31 March 2024, the input tax credit must be claimed by 30 November 2024 or by the date of filing the GSTR 9 Form, due by 31 December 2024.

Documents Required to Claim Input Tax Credit (ITC)

To claim an Input Tax Credit under GST, the following documents are necessary:

An invoice is issued by the supplier of goods or services.
A debit note issued by the supplier, if applicable.
Bill of entry.
Invoice issued under specific conditions, such as a bill of supply issued instead of a tax invoice for transactions below Rs 200 or when the reverse charge mechanism is applicable as per GST regulations.
An invoice or credit note is issued by the Input Service Distributor (ISD) in compliance with GST invoicing rules.
A bill of supply issued by the supplier covers both goods and services.

How to Claim GST Input Tax Credit?

To claim an input tax credit (ITC) under GST, follow these systematic steps:

File Monthly GST Returns: Submit Form GSTR-3B monthly, detailing your output tax liabilities and input tax credits.
Verify ITC Details: Review the input tax credits listed in Form GSTR-2B, an auto-generated statement based on your suppliers' returns.
Reconcile Discrepancies: Address any differences between your claimed ITC and the details in Form GSTR-2B. If discrepancies are found, make the necessary adjustments in the subsequent month's return.
Rectify Excess Claims: If you have claimed more ITC than you are entitled to, rectify this by paying the excess amount along with any applicable interest and penalties.

Special Note: Regular taxpayers are required to report their ITC in Form GSTR-3B, specifically in Table 4, which includes sections for eligible ITC, ineligible ITC, and reversed ITC for the tax period. Taxpayers must ensure that their claimed ITC is reflected in their GSTR-2B to match their purchase register accurately.

Reversal of Input Tax Credit

Input Tax Credit (ITC) is only available for goods and services used for business purposes. ITC cannot be claimed if they are utilized for non-business (personal) purposes or to make exempt supplies. Additionally, certain conditions necessitate the reversal of ITC. ITC must be reversed in the following scenarios:

Non-payment of Invoices Within 180 Days: If invoices are not paid within 180 days of issuance, the claimed ITC must be reversed.
Credit Note Issued to ISD by Seller: For Input Service Distributors (ISD), if a seller issues a credit note to the head office, any ITC claimed on the original invoice must be adjusted accordingly.
Inputs Used Partially for Business and Partially for Non-Business Purposes: If inputs are used for both business and personal purposes, the ITC attributable to the personal use portion must be reversed proportionately.
Capital Goods Used Partially for Business and Partially for Non-Business or Exempt Supplies: Similar to inputs, if capital goods are used partly for business and partly for personal or exempt purposes, ITC must be reversed accordingly.
Insufficient Reversal of ITC: After filing the annual return, if it's found that the ITC reversed for non-business or exempt purposes during the year is less than required, the shortfall must be added to the output tax liability. Interest will be applicable on this additional amount.

Details regarding the reversal of ITC should be included in the GSTR-3B.

Special Cases of Input Tax Credit (ITC)

ITC for Capital Goods

Under GST, ITC is available for capital goods, but there are exceptions:

Capital goods are used exclusively to produce exempt goods.
Capital goods are used exclusively for non-business (personal) purposes.

Additionally, ITC cannot be claimed if depreciation on the tax component of the capital goods has been claimed.

ITC on Job Work

A principal manufacturer can send goods for further processing to a job worker. For instance, a shoe manufacturer may send partially made shoes to job workers for sole fitting. In this scenario, the principal is eligible to claim ITC on the tax paid on the goods sent for job work. ITC is permissible whether goods are sent from the principal’s place of business or directly from the supplier’s place of supply. However, to qualify for ITC, the principal must receive the goods back within one year or three years for capital goods.

ITC Provided by Input Service Distributor (ISD)

An input service distributor, such as a head office, branch, or registered office of a GST-registered person, aggregates the input tax credit from all purchases and distributes it to various branches under categories like CGST, SGST/UTGST, IGST, or cess.

ITC on Transfer of Business

In cases of business amalgamations, mergers, or transfers, the transferor’s available ITC can be transferred to the transferee during the business transfer process.

Can I claim ITC on exports under GST?

Yes, export businesses can claim Input Tax Credit (ITC) under GST. The ITC can be received through a bank refund after filing the GST refund form (RFD-01). However, this provision is not applicable to local businesses.

GST Input Tax Credit (ITC) Reconciliation

As mentioned above, GST ITC Reconciliation ensures that the Input Tax Credits claimed by a business align with the tax credits approved by the suppliers. This reconciliation is crucial for maintaining accurate tax records and compliance with GST regulations. Also, read our article - GST Compliance: Year-End Checklists for FY 2023-24

Why IndiaFilings for GST ITC Reconciliation?

Maximize your GST compliance and ensure accurate input of tax credit with IndiaFilings. Our dedicated experts specialize in GST ITC Reconciliation, helping you align your tax credits efficiently and effectively. Avoid discrepancies and enhance your financial accuracy. [shortcode_36]