What is Input Tax Credit (ITC) Under GST?

What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) is a mechanism that allows businesses to claim credit for the tax they’ve paid on their purchases. Input Tax Credit in GST ensures that companies are only taxed on the value they add at each stage of the supply chain, not on previous stages of production. By using ITC, companies also avoid the “cascading effect” of taxes, where tax is charged on top of tax.

Input Tax Credit Example

A manufacturer purchases raw materials worth ₹10,000 from a registered supplier and pays 18% GST of ₹1,800. When the manufacturer sells the finished product for ₹15,000, they collect 18% GST of ₹2,700 from the customer. The manufacturer is eligible to claim an Input Tax Credit (ITC) of ₹1,800 for the GST paid on the raw materials.

Instead of paying the entire ₹2,700 to the government, the manufacturer can claim this ITC. This reduces their net GST liability to ₹900 (₹2,700 – ₹1,800), which they will pay to the government via the GST portal.

How to Calculate Input Tax Credit?

A business registered under GST purchases raw materials worth ₹10,000. The GST rate on raw materials is 18%. The company also purchases office supplies worth ₹20,000, subject to a GST rate of 18%.

1. ITC Calculation

Raw Materials ITC: ₹10,000 * 18% = ₹1,800

Office Supplies ITC: ₹20,000 * 18% = ₹3,600

Total ITC: ₹1,800 + ₹3,600 = ₹5,400

2. Output Tax

Assuming the business sells the finished goods or services worth ₹40,000 at a GST rate of 18%, the output tax would be:

Output Tax: ₹40,000 * 18% = ₹ 7,200 

3. Net GST Payable

Net GST Payable = Output Tax – ITC

Net GST Payable: ₹7,200 (Output Tax) – ₹5,400 (ITC) = ₹1,800

This example of Input Tax Credit under GST illustrates how a business can reduce its tax liability to ₹1800 by utilising ITC.

Note: This is a simplified example, and the actual ITC calculation may vary depending on specific factors such as the nature of the goods or services, the applicable GST rates, and any restrictions or reversals of ITC. It’s always advisable to consult with a tax professional for accurate guidance.

Who Can Claim ITC?

Under the GST Act, registered businesses that comply with certai conditions are eligible for GST Input Tax Credit.

These conditions to claim ITC are:

• The dealer must have a valid tax invoice, debit note, or relevant GST documents.
• If the goods are received in batches, ITC is claimable only after receiving the final lot.
• The taxpayer must file a GST return regularly. It ensures accurate reporting of sales and purchases.
• If the buyer does not pay the supplier within 180 days from the invoice date, ITC under GST cannot be claimed.
• ITC is not allowed if depreciation has been claimed on the tax component of capital goods.
• Certain goods and services, such as motor vehicles, food, beverages, and beauty services, are restricted from ITC claims in GST.

What Can Be Claimed as Input Tax Credit (ITC)?

Businesses can claim ITC for their commercial activities. You can not claim it for goods or services used for personal purposes or exempt supplies.

A few common items that businesses usually claim as ITC are:

• Cleaning services for maintaining business premises.
• Rent for office space or storage.
• Internet and communication costs.
• Bank fees for financial transactions.
• Repairs and maintenance of machinery.
• Advertising costs for promoting business services.
• Legal and conslting fees for professional services.
• Conferences and training costs.

What Cannot Claimed as Input Tax Credit (ITC)?

Here is the list of restricted goods and services from ITC.

• Motor vehicles and conveyances.
• Insurance, repairs, and maintenance for motor vehicles.
• Health and life insurance, rent-a-cab services.
• Membership fees.
• Works contract services for the construction of immovable property.
• Employee travel benefits (LTA, vacation benefits).
• Goods used for personal consumption.
• Goods lost, destroyed, or stolen.
• Goods and services under the composition scheme.

Conditions to claim an Input Tax Credit under GST

GST-registered buyers must meet specific conditions outlined under Section 16 of the CGST Act to claim ITC:

1. Goods or Services Used for Business

ITC can only be claimed if the goods or services are used for business purposes.

2. Possession of a Tax-Paying Document

The buyer must possess a valid tax invoice, debit note, bill of entry, or any other document proving the tax payment.

3. Receipt of Goods or Services

ITC can be claimed only when the buyer has received the goods or services. If received by an agent or another party on behalf of the buyer, it is still considered valid.

4. Payment of Tax to the Government

The supplier must have paid the tax on the supplied goods or services to the government, either in cash or by using ITC.

5. Payment within 180 Days

If the buyer does not pay the supplier within 180 days of the invoice date, ITC will not be allowed.

6. Goods Received in Instalments

When goods are delivered in multiple lots or instalments, ITC is allowed only after receiving the final instalment.

7. No ITC on Depreciated Capital Assets

If depreciation is claimed on the tax component of a capital asset, ITC cannot be claimed on that component.

8. Timely Filing of Returns

ITC cannot be claimed after November of the following financial year or upon submitting the relevant annual return, whichever comes earlier.

Time limit to Claim Input Tax Credit Under GST

The time limit to claim Input Tax Credit (ITC) is 30th November of every financial year. Failing to claim ITC within this period will result in the credit lapsing.

Documents Required to Claim Input Tax Credit (ITC)

• Tax invoice issued by the supplier.
• A bill of supply issued when the total amount is less than ₹200 or when a reverse charge mechanism is applicable.
• A debit note issued by the supplier, if applicable.
• Bill of entry issued by the customs department.
• Invoice or credit note from ISD.

How to Claim Input Tax Credit (ITC)? A Step-by-Step Guide

• STEP 1: In the GSTR-3B form, declare all eligible ITC, like credits from imports, reverse charge supplies, input service distributor (ISD) invoices, and other eligible purchases.
• STEP 2: If any inputs, services, or capital goods are used for non-businss or exempt supplies, reverse the proportionate Input Tax Credit in GST.
• STEP 3: Subtract the reversed ITC from the total available ITC to arrive at the net ITC you can claim for the tax period.
• STEP 4: Exclude ITC on items restricted under Section 17(5) of the CGST Act, such as employee-related expenses (travel, food, etc.).
• STEP 5: Enter the final net ITC amount in the appropriate section of GSTR-3B and submit the return.

Earlier, taxpayers could claim full ITC based on their records. However, Rule 36(4) introduces a new restriction on claiming ITC. Now, you cannot claim more than 105% of the ITC reflected in GSTR-2B as provisional credit. This 5% provisional ITC rule does not apply to the import of goods, input service distributors and, reverse charge mechanism (RCM).

GST Rules to Claim Input Tax Credit (ITC)

• Ensure you have valid documents like tax invoices, debit notes, and bills of entry to claim ITC.
• Tax invoices must comply with e-invoicing requirements.
• For supplies under reverse charge, a self-invoice is required for claiming ITC.
• You must have received the goods or services to claim ITC. If received in a different month, ITC can only be claimed that month.
• If the supply is received by someone else on your instruction, it’s still considered received by you.
• The supplier must deposit the collected tax in the government’s account. If they don’t, your ITC may be denied.
• ITC claims are based on supplier details in GSTR-1 and reflected in your GSTR-2A/2B. Regular reconciliation is necessary.
• You must file your GST returns to avail eligible ITC.
• Pay your supplier within 180 days of the invoice date to avoid ITC reversal and interest charges.
• Ensure your ITC claims do not fall under the ‘blocked credit’ category as specified in GST regulations.

Items on which ITC is not allowed

• ITC is not available for vehicles with a seating capacity of 13 or fewer (including the driver), vessels, and aircraft unless used for specific purposes like transporting goods or training.
• It cannot be occursed on food and beverages unless the business operates primarily in that sector.
• Credits are disallowed for beauty treatments and health services, except for businesses providing these services.
• Memberships for clubs, gyms, or fitness centres are also ineligible.
• Cab rentals and health insurance are excluded, except under specific government mandates or for businesses in those sectors.
• Travel concessions or benefits provided to employees are not eligible for credit.
• Works contracts related to immovable properties (except machinery and plant) are also blocked.
• Construction of immovable property for one’s business use is ineligible.
• Businesses registered under the composition scheme cannot avail of the credit.
• Goods and services purchased for personal consumption are excluded.
• Non-resident taxable entities can only claim credit for imported goods.
• Goods given as free samples or destroyed/lost items are not eligible for credit.
• Standalone restaurants cannot claim credits, though it is allowed for those in hotels with higher room charges.
• It cannot be claimed in cases of fraud.

Reversal of Input Tax Credit

Reversal of Input Tax Credit under GST happens when a business must give up the credit it previously claimed.

This reversal can be necessary in several situations:

1. Non-Business Use

If the goods or services acquired are used for purposes not related to the business, the corresponding ITC must be reversed.

2. Exempt Supplies

When inputs are used to produce exempt supplies, businesses must reverse the ITC related to those inputs, as no tax is collected on exempt supplies.

3. Non-Taxable Supplies

If goods or services are employed in making non-taxable supplies, businesses prohibited the ITC for inputs used in those transactions.

4. Delayed Receipt of Inputs

If the inputs are not received within 180 days from the invoice date, the ITC claimed on those inputs must be reversed, as the eligibility for claiming ITC depends on receiving the goods or services.

ITC Reconciliation

ITC reconciliation is the process of verifying the details of purchase data submitted by the taxpayer with the details filed by the supplier in GSTR 1. The supplier’s information is autommusty reflected in the taxpayer’s GSTR 2A. This allows validation of the information provided by the supplier. Businesses can use GST verification tools to compare their GSTR 2A woccursupplierReconciliation is vital for building client trust, avoiding tax notices, and identifying invoice errors.

Tips for Effective ITC Reconciliation

1. Start Early

Initiating the reconciliation process well in advance allows sufficient time for thorough review and make necessary corrections,

2. Maintain Accurate Records

Having detailed documentation readily available will simplify the reconciliation process and ensure accuracy.

3. Reconcile Regularly

Regular checks will help you identify any discrepancies.

4. Utilize Automation

Automation can enhance efficiency, reduce manual errors, and streamline data comparison.

5. Seek Professional Assistance

If you face uncertainty and complexity in transactions, don’t hesitate to consult with a tax professional.

Special Cases of ITC

ITC for Capital Goods

Capital goods are assets like machinery, equipment, and buildings. They are used by businesses to produce goods or services.

ITC is available for capital goods except under the following conditions:

• It can not be claimed if the capital goods are used exclusively to produce exempt goods.
• It can not be claimed if the capital goods are utilised solely for personal purposes.
• If a business claims depreciation on the tax component of the capital goods, ITC on those items cannot be claimed.

ITC on Job Work

Job work refers to a principal manufacturer sending goods to a job worker for further procession. For example, a shoe manufacturer may send partially finished shoes to a job worker for sole fitting. The principal can claim ITC on the tax paid for goods sent, ether from their location or directly from the supplier. To qualify for ITC, the principal must receive the processed goods must be returned within one year, or three years for capital goods.

ITC Provided by Input Service Distributor (ISD)

An ISD is an entity that receives input services and distributes the corresponding ITC to various units within a company. The ISD aggregates the ITC from all purchases and allocates it to different branches based on their requirements. The distribution occur under different tax categories like CGST, SGST/UTGST, IGST, or cess. This ensures that each branch receives the appropriate amount of ITC to offset their tax liabilities.

ITC on Transfer of Business

In business mergers or transfers, the ITC of the old business can be passed on to the new one. This system helps maintain continuity in tax credits and supports business operations during significant changes in ownership or structure.

Recent Updates and Changes in ITC Rules

• Businesses now have until November 30 to claim Input Tax Credit for the previous financial year, extended from the original deadline of September 30.
• Since January 1, 2022, businesses can only claim ITC based on an auto-generated statement from the GST portal. This is a shift from the earlier two-way communication model.
• The previous option to claim provisional ITC for unreported invoices has been removed. Now, claims must rely solely on the auto-generated statement.
• The CGST Act distinguishes between ‘ITC availed’ (the eligibility to claim) and ‘ITC utilised’ (the actual use of the credit). Interest may apply on any excess ITC claimed.

Frequently Asked Questions

1. Who is eligible for ITC in GST?

A registered taxable individual or entity that pays applicable taxes during business activities can claim ITC.

2. What is meant by input tax?

Input tax includes CGST, SGST, IGST, UTGST, and taxes under the reverse charge mechanism. It excludes taxes paid under the composition scheme.

3. Can we claim ITC on hotel stays?

Yes, ITC can be claimed GST on hotel services if the hotel charges SGST and CGST, and it’s located in the same state as the business traveller or the company. However, ITC on in-house restaurant charges (5% GST) is not allowed.

4. How to calculate ITC?

• Summing up the GST paid on all purchases during the relevant tax period.
• Identify which inputs qualify for ITC.
• Determine the total ITC by multiplying the total eligible GST paid on purchases by the eligible input percentage.
• Subtract the calculated ITC from the GST payable on sales for that tax period.

5. Is ITC refundable?

Yes, unutilised ITC can be refunded under certain conditions like Inverted Duty Structure (IDS). To apply for a refund, you need to fill out forms (Statement 1 and Statement 1A of Form GST RFD-01A) and confirm that you haven’t claimed any tax drawbacks.

6. What is the ITC claim period?

You can claim ITC for invoices issued within the financial year until November 30 of the following year.

7. What are the benefits of ITC?

ITC reduces the tax burden by allowing businesses to credit input taxes against output tax. It improves cash flow and profitability.

8. Can we claim an ITC refund?

Yes, a registered person can claim a refund of unutilised ITC at the end of any tax period.