Input tax credit or ITC under GST is the tax that a business has already paid on purchases and can be used to reduce GST liability on sales. This is not a new concept; it already existed in the pre-GST indirect tax era. The scope of ITC has been broadened under GST and there are various rules governing the same.
Let’s understand the concept of Input Tax Credit (ITC) under GST, the criteria to claim ITC, reversal of ITC and the time limit to claim ITC in this article.
What is Input Tax Credit?
Input tax credit means reducing the taxes paid on purchases (inputs) from the taxes to be paid on sales (output).
In the pre-GST era, the taxpayers could not claim the credit on central sales tax, entry tax, luxury tax and other indirect taxes. Also, service providers and manufacturers could not claim excise duty and service tax paid on their purchases.
With the introduction of GST, many indirect taxes such as VAT, CST, excise duty have been subsumed, and now there are no restrictions on claiming tax paid on purchases.
For instance, let’s say you are a manufacturer and have to pay tax of Rs 500 on your final product. But the tax you paid on the raw materials you purchased was Rs 400. Hence, you can claim credit of Rs 400 and pay the final tax liability of Rs 100 only.
What is the time limit to claim ITC under GST?
A registered taxpayer must claim ITC within the earlier of the following:
- Furnishing of an annual return
- Due date of filing the monthly return (GSTR-3B) for the September month following the end of the financial year to which such invoice relates to
Say, you have a purchase invoice dated 18th December 2019. You must claim credit of taxes paid on such invoice by the earlier of the following dates:
- Due date of filing an annual return (depends on any notification from CBIC) – 31st December 2020
- Due date for filing GSTR-3B for September 2020 – 20th October 2020
So, you will have to claim ITC on this invoice till 20th of October 2020 only.
Who can claim the input tax credit (ITC)?
You have to satisfy the following conditions to be eligible for claiming input tax credit under GST:
- You must be a registered taxable person
- If purchases were made for business purpose, you can claim the input tax credit (ITC) only
- You must have a tax invoice (of purchase) or debit note issued by a registered supplier
- Your supplier must have filed GST returns and the tax charged from you on purchases has been deposited to the government
- Only if there is an actual receipt of goods or services, you can claim ITC
- You will not be able to claim ITC if depreciation has been claimed on the tax component of a capital good
Please note that a person registered under the GST composition scheme cannot claim ITC.
How does input tax credit work under GST?
A regular taxpayer must report the amount of input tax credit (ITC) in their monthly GST return, which is GSTR-3B. Table 4 of Form GSTR-3B requires the summary of eligible ITC, ineligible ITC and ITC reversed, if any during a particular period. Here’s a detailed look at table 4 from GSTR-3B:
Can input tax credit (ITC) be reversed?
Reversal of ITC means the amount claimed by you as credit will be added back to your tax liability along with interest. This happens under special circumstances.
Here is the list of specific circumstances where ITC claimed by a regular taxpayer can be reversed:
- When the invoices have not been paid under 180 days from the date of issue of such invoices
- If the purchased goods (capital goods or non-capital goods) are partly used for business purposes and partly for exempted supplies or personal use
- When a credit note is issued to an input service distributor (ISD) by a seller
The details of reversed ITC will be furnished in the form GSTR-3B.
What documents are required for claiming ITC?
The following documents are required to claim ITC under GST:
- Tax invoice issued by a supplier of goods or provider of services
- Any debit note issued by the supplier to the recipient
- A bill of entry
- An invoice or credit note issued by the input service distributor (ISD)
- A bill of supply issued by a supplier of goods or services or both
You can create GST compliant invoices using Razorpay Invoices. It is a smart product to help you generate invoices quickly and efficiently. All you have to do is to enter the details of goods supplied, along with the value of such goods and the invoice will be ready in a fraction of seconds.
After the GST-compliant invoice is created, you can share the invoice’s link to your customers via email or SMS. The receiver of goods will be able to claim ITC of his purchases based on your GST-compliant invoice only.
How to utilise input tax credit?
While making payment of CGST/SGST/IGST, the ITC amount will be utilized in the following manner:
|Credit of||First to be utilized for payment of||Balance if any|
|IGST||IGST||CGST and then SGST|
Different scenarios under ITC
- When capital goods are purchased – You can claim 100% of the input tax credit in the first year of purchases. However, if depreciation has been claimed on the GST component of capital goods, such ITC will not be allowed
- When a business is transferred – In case of merger/transfer/amalgamation of business, the available ITC will be passed on to the transferee at the time of acquisition or merger of a business.