All About Input Tax Credit under GST
Learn everything about Input Tax Credit (ITC), its eligibility, claims, restrictions, and latest GST updates to maximize tax savings for your business
All About Input Tax Credit under GST
This will explain a key part of India's Goods and Services Tax (GST) system—Input Tax Credit (ITC). It will cover the rules for claiming ITC, cases where credit is not allowed, and common questions. Understanding this is essential because ITC directly impacts a business’s cash flow and tax payments. Let understand for above topic "All About Input Tax Credit under GST"
What is Input Tax Credit.
The Basic Definition
Input Tax Credit means the amount allowed to the firm by GST on inputs paid, which are goods and services for the business. The value one pays for something that is acquired for the business can adequately be deducted by that business at the point of displaying its GST when it sells its products. It has the effect of avoiding double taxation of goods and services as well as the effective cash management into the business.
How ITC Works
Let me first show you, through an example, how ITC works:
- Manufacturer: In the case of the manufacturer; he purchased raw material from someone for ₹ 1000 and also paid 18% GST on ₹ 1000. He can recover Rs. 180 as ITC.
- Sale of Goods: The manufacturer manufactures ready-for-sale, finished goods with a sale value of ₹2000 and collects ₹360 as GST.
- Tax Payable: Let's now work out how much of the net GST will be paid by the manufacturer to the government:
GST on sale :Rs. 360.Lower: Sales caught by ITC: Rs180Net GST payable: Rs360 - Rs180 = Rs180.
This mechanism thus ensures that GST is collected only on the value added at each level of supply.
Conditions for Availing ITC
The GST law has also given conditions to businesses for them to meet in order to claim ITC. The requirements include the following:
- Registered Supplier: Further, he/she must be registered in the GST regime. In case the supplier hasn't got registration, then you cannot claim ITC on that purchase.
- Receipt of Goods/Services: You should have received goods or services wherein you are claiming ITC. No ifs and buts; a tax invoice is not sufficient; you must have the goods in hand or be availing the service.
- Tax invoice legitimate: ITC would arise only against the original tax invoice or debit note issued by supplier. These would, of course, also contain details such as GSTIN of supplier, GSTIN of receiver, description of goods and services supplied, amount of consideration and the amount of GST levied.
- Payment of Tax: Under the GST already paid by the supplier to the government, it is compulsory to have been done. Without filing the return of the supplier's GST, you cannot claim ITC, although you have a valid invoice.
- Prompt Claim: This will be recovered in return for the month when goods or services received are otherwise valued, or later, but in the same financial year. Failure may make them lose the right to claim ITC on that very purchase.
- Properly Filed Returns: In addition, one needs to ensure that the filling of returns they make is accurate to begin with because small mistakes may result in denial of claims.
Types of ITC Claims
- Periodic ITC: This is the usual ITC that an organization can claim on inputs and input services used for the supply of taxable supplies.
- CVD on Capital Goods: Although it is claimed on capital goods or assets used by the business for quite a long period, that claim on capital goods is normally spread over the years.
- Partial ITC: This is the reason why some businesses have taxed and exempt supplies. In such a case, they can only claim a proportionate ITC based on their taxable sales.
Credit Blocked
Although ITC is considered a positive factor, businesspeople cannot claim ITC in some cases. Such blocked credits are, However, as follows:
- For private purposes: Those goods and services which are consumed by a businessman himself cannot be classified as ITC. Example: Grocer items are being purchased by the businessman for his own use, and he pays GST, the GST paid thereon cannot be claimed as ITC.
- Exempt Supplies: Exempt supplies-often goods or services not liable to GST-made by an enterprise cannot avail an input tax credit on inputs used for making such exempt supplies.
- Motor Vehicles: ITC on motor vehicles is permitted only if they are used for specified use as under:
- Transport of freight
- Providing training
- Hotel and lodging convenience services
- Foods and Beverages: For example, for GST on food, beverages, and catering outside the premises, in general, this is not allowable credit except when part of business operations, such as providing food for employees during office hours.
- Membership Fees: No ITC is available on payments made for membership in clubs, gymnasiums, beauty parlors, etc.
- Commodities and Services Not for a Commercial Purpose: Anytime the ITC is utilized for non-business purposes, this GST paid on the goods or services consumed will be excluded.
Extraordinary circumstances under which ITC is available are:
- A person who has applied for registration within 30 days of becoming liable for registration shall be entitled to the credit of input tax in respect of goods held in stock, namely inputs as such and inputs forming part of semi-finished or finished goods, as he had on the day immediately preceding the date from which he becomes liable to pay tax.
- A person who has made the voluntary registration shall be allowed to take the input tax credit on all the inputs held in stock as on the date of immediately preceding the date of registration contained under section 23(3) of the WBGST Act, 2017.
- Under section 10, an individual exercising an option to choose normal scheme from composition scheme can claim ITC of inputs as such and inputs forming part of semi-finished or finished goods lying in stock and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as a normal taxpayer.
- Where an exempt supply of goods or services or both made taxable, a person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.
- ITC, in each of the above, shall be available within 1 year from the date of invoice issued by the supplier. f. In case of a change of constitution of a registered person on account of sale, merger, demerger etc., the unutilised ITC shall be allowed to be transferred to the transferee.
- In a transition from a composition scheme under section 10 to a normal scheme or where a taxable supply becomes exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods would have to pay ITC reversal).
- In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on the transaction value of the supply is more, the same would have to be paid.
ITC Claiming: A Step-by-Step Procedure
Step 1: Documenting Properly
Make sure to have the following documents:
Valid tax invoicesPay off-set evidence
Others are supporting relevant documents.
Step 2: File GST Returns
This means you would identify which ITC you are entitled to when filing your GST return. This is typically filed in the form of GSTR-3B.
Step 3: Reconcile ITC
Reconcile your claims with ITC against the information available on the GST portal. Reconciliation would essentially mean making a claim for ITC only where the supplier has filed his GST returns.
Step 4: Track the Timelines
Accounts should be maintained in respect of timelines for claiming ITCs to avoid missing out on any eligible credits.
Frequently Asked Questions (FAQs)
1. Who can avail of ITC?
HENCE, any tax payer under GST must fulfill all such qualifying conditions if he intends to claim ITC on the GST paid on input and input services.
2. How do I claim ITC?
You can claim ITC by reporting it in your GST return, provided you have valid documents like tax invoices.
3. What if I forget to claim ITC for the month?
For example, this means that you can still lodge your claim on subsequent months but do it within the same financial year.
4. ITC Is a time limit applicable for the claim?
Yes, it must be claimed within the financial year in which the same was purchased or before the filing of the annual return, whichever is earlier.
5. Can I claim Input Tax Credit on goods bought for personal use?
The ITC cannot be available for use on goods or services for personal purposes.
6. What if my supplier did not pay the tax?
Since you will not be getting the ITC if the supplier does not pay GST to the government.
7. What are the adverse effects of misdeclaration of ITC?
The wrong ITC reclaimed carries penalty and interest in addition to what has been reclaimed. Keeping accurate records and complying with GST regulations is paramount.
8. Whether ITC can be availed on capital goods?
No, you can't claim it against capital goods though it would spread over some years.
9. What is the status tracking process of my ITC claims?
In fact, through the GST portal, the ITC claims can be traced whereby all your purchase details would reflect and enable reconciliation with your suppliers' filings.
10. What if I am an exporter? Can I claim ITC?
Yes, beside, the availability of the option to recover unused ITC, ITC can be allowed on inputs and input services used for export production of goods or services.
Conclusion
ITC is that crucial determinant that will enhance business and cash-flow efficiency under GST. Provided the conditions for availing of ITC are met, good knowledge of what credits are blocked and adequate records will help a business maximize its gain from this beneficial tax feature. With such great alertness regarding the way ITC functions, small business owners or bigger corporations can go a long distance. Of course, for more precise advice and in regard to any GST changes, one should always seek tax professionals. This book gives you everything to know about ITC so it is not that complicated and so you will be able to take control of your business finance.
Join the conversation