Overview
With the introduction of GST in the year 2017, one of the most important novel concepts introduced was the Input Tax Credit for a person registered under GST. The GST taxation structure has ITC in its core, which helps businesses and individual dealers to claim credits based on the taxes paid by them during making purchases of raw materials or capital goods for their business. GST is a single tax that is based on the concept of destination based consumption (right from the manufacture of goods/ services till it reaches its end customers), the chain doesn’t get broken midway and every single business/individual supplier registered under GST gets the advantage of the same through the seamless flow of credit as the ITC allows them to reduce their overall tax liability out of the already paid taxes on inward supplies made by him in the course of his business.
Before the introduction of GST, there were multiple taxes applicable on the same business/individual dealers namely-Service Tax, VAT, and Excise which made it difficult to create a single chain of credit for the benefit of a business person as one tax could not be set off or claimed against input tax of the other tax which had to passed to the ultimate consumer that hurt his pockets due to high prices. For instance, Business dealers who used to pay service tax on the rent payments of their shop could not set off the same against the ITC of the VAT taxes he collected from the sale of goods from its customers.
However, with the abolishment of the above-mentioned taxes and with the introduction of GST all these problems have been eliminated. Further, there is no requirement of one-to-one connection between the inward supplies and outward supplies of the registered person as a result of which ITC claimed by the registered person could be used for tax payments on any taxable outward supplies.
Meaning & Definition of ITC
In simple words, Input Tax Credit means claiming taxes paid by a business/individual while purchasing goods or services or both for manufacture or provision of services in the due course of the business. After claiming and authenticated under the online GST portal such taxes as credits they will be apparent on the E-credit ledger of the person after which he may either reduce his output tax liability by using the ITC or may seek a refund.
For instance, if you are a registered manufacturer of goods under GST, and the tax payable on your final product is Rs.450 out of which Rs. 300 is the tax paid by you while purchasing raw material for your goods. You will be eligible to claim Rs. 300 as ITC and reduce your overall liability by Rs.300, as Rs.450-300= 150, which shall be your final tax liability. Thus, any manufacturer, supplier, agent, e-commerce operator, aggregator, or any other person registered under GST (apart from some exceptions) will be eligible to claim and avail ITC for the purchases made in their day-to-day business operations. Before diving into more details, let’s have a thorough understanding of input tax credit.
Composition & Manner of Utilisation of ITC-
An Input Tax credit could be availed for the following taxes under GST-
i. Central Goods and Services Tax Act (CGST) is a Central –level tax that is levied on intra-state supplies or any supply made within the union territory for the supply of goods or services or both.
ii. State Goods and Services Tax (SGST) is a State –level Tax which is levied on the supply of goods or services or both when supply is being made within the state only.
iii. Union Territory Goods and Services Tax (UTGST) is which is levied on the supply of goods or services within the same union territory.
iv. Integrated Goods & Services Tax (IGST) is a center-level tax that is levied on the inter-state supply of goods or services of both. So, the ITC availed through the abovementioned taxes shall be utilized by the assessee in the following order-
v. Credit of CGST –Out of the ITC credits available, CGST shall be allowed to be utilized in the order of priority against CGST/IGST and the remaining balance could be utilized for the payment of IGST. It is to be noted that any tax credit of CGST cannot be set off against the payment of SGST.
vi. Credit of SGST/ UTGST – Allowed 1st for payment of SGST/UTGST and the balance can be utilized for the payment of IGST. It is to be noted that any tax credit of SGST/UTGST cannot be set off against the payment of CGST.
vii. Credit of IGST – Allowed 1st for payment of IGST, then for payment of CGST, and the balance for payment of SGST/ UTGST.
Eligibility Criteria for Availing ITC
In order to meet the eligibility criteria, these two conditions must be fulfilled-
i. Taxpayer must be registered under the GST regular scheme
Section 16 (1) of the CGST Act provides that an ITC shall only be allowed to a person registered under GST. Whenever such registered person receives inward supplies (makes purchases) of either goods or services or both, the tax paid by him for making such purchases shall be allowed for him to receive as a credit on the input tax. However, this shall be subject to the provisions related to the use of ITC provided under s.49 of the CGST Act and conditions provided thereunder. According to which an unregistered person cannot avail ITC.
ii. Goods/Services must be either used or intended to be used in furtherance of business
Secondly, the goods/services or both purchased by the registered person shall only be used in the furtherance of business activities and not for personal purposes. However, no ITC shall be allowed to the registered person on inward supplies if he undertakes the outward supply (sales) of goods/services for exempted goods or services.
However, the following persons are prohibited from availing ITC under GST (only allowed in exceptional cases)-
- Persons/Businesses unregistered under GST;
- Person/businesses registered under Composition Scheme;
- Persons who have claimed depreciation on the tax component.
- Persons/Businesses dealing in exempt supplies. (Except in case of Zero-rated Supplies i.e. if exports or supplies made to special economic zones, ITC shall be allowed;
- No ITC shall be allowed on purchase of capital goods to be used for personal purposes;
- Persons/Businesses who have opted for composition levy;
- For Purchase of capital goods to be used in the manufacture of exempted goods
- Blocked credits (under Section17 (5))
What are the conditions for claiming Input Tax Credit under GST?
A registered person must fulfill the following conditions to claim ITC under the GST portal-
i. The assessed must possess a valid tax invoice, debit note, or other similar documents as issued by a registered dealer.
ii. The assessee must have received goods/ services or both. In the case where goods are being received in installments, then the ITC could be claimed against the tax invoice of the latest installment.
iii. The supplier must have paid taxes on the inward supplies to the Government either in cash or by claiming input tax credit and must have filed GST returns for claiming ITC.
iv. It is one of the most unique features of the tax setup that no assessee could claim taxes on inward supplies until and unless the supplier of goods follows GST compliance and makes tax payment to the Government so collected from the assessee.
v. In order to claim ITC on the portal by the assessee for inward supplies, it shall be necessary for him to make payments to the supplier within a maximum period of 180 days from the date of issue of an invoice. If he fails to do so, the possible ITC to be availed will be added to his output tax liability, and only after the payment of taxes, he will receive ITC.
Documents required for claiming ITC
Provided below are the documents required for claiming ITC under GST-
i. Copy of Invoices issued by the supplier;
ii. Invoices issued by the business supplier that are similar to Bill of Supply, in cases where the total amount is lesser than Rs. 200 or in cases where reverse charge mechanism is applicable;
iii. Any debit note issued by the supplier;
iv. Any Bill of Entry or like documents issued by the Customs Department;
v. Any Bill of Supply issued by the supplier;
vi. Any Document issued by the input service distributor (ISD) could be an invoice or a credit note.
How to claim input credit under GST?
Step 1. Fulfill the basic three requirements-
Before we start the process of claiming ITC through the GST portal, ensure the following requirements are met-
i. GST Tax Invoice- This is one of the most important requirements for availing of ITC under GST. Every tax invoice for the relevant period must be retained as well as uploaded online for availing ITC.
ii. Receive the Goods & Services-Whenever a tax credit refund is to be claimed, the goods & services based on which ITC is to be claimed must be received. For tax refund purposes from ITC, an acknowledgment regarding the receipt of goods or services will act as proof of tax paid by the dealer or supplier to the GST department shall be necessary. However, if the assessee has not paid taxes or has failed to retain invoices, he shall not be able to claim GST.
iii. Furnishing of GST Return-Lastly, to claim ITC, it shall be necessary for the assessee to file GST returns timely within the due dates prescribing details about the inward and outward supplies under GST. Therefore, for the purpose of availing ITC, it is necessary to have a copy of the GST return shall be necessary to verify the authenticity of ITC through the business dealings of the specified goods and (or) services.
Step 2. Upload Tax-invoices on the GST Portal
In the next step, the assessee will be required to upload all the tax invoices issued in the specified form GSTR 1. Then all the details related to outward supplies will be auto-populated in form GSTR 2A or GSTR-2B, which shall be verified by the supplier when he files GSTR 2 (i.e. details of inward supplies).
Step 3. Verify the details & Get ITC
Further, the supplier will acknowledge and accept the details related to the purchases made and are reported correctly. On the authentication of entries, the taxes collected on purchases will be credited to the ‘Electronic Credit Ledger’ of the supplier which could be used by him to first adjust the amount against his future tax liability and get a refund.
Step 4. Claim any Unclaimed ITC on GST portal
Moreover, it is also possible that any unclaimed ITC is remaining in the GST portal due to the reason that higher taxes were paid by the supplier than the taxes collected on sales. In such a situation, such ITC could be either carried forward or could be claimed for a refund by the assessee. In case-
- Tax on inputs > tax on output= Either carry forward input tax or claim refund ; or
- Tax on output > tax on inputs –> Pay balance amount
However, it is upon the assessee to make a decision timely as ITC availed on purchase invoices older than one year time are only allowed in special circumstances mentioned under Section 18(1).
Is ITC also allowed in case of import of goods/services?
Yes, a business dealer would be able to obtain ITC in case of imports for IGST & GST Compensation Cess, but ITC shall not be available in case of the Basic Customs Duty (BCD).In order to avail ITC for IGST and GST Compensation Cess, an importer shall be required to declare his GSTIN in the Bill of entry, after which the ITC shall be validated through the GST portal which is inter-connected with the GST portal. It is under this interconnected portal bill of entry is digitized and applied for the validation of input tax credit on the GST portal.
Time limits for claiming ITC under GST
ITC could only be claimed and availed for tax invoices & debit notes that are lesser than one year old. The due date for claiming ITC shall be earlier than the following-
i. Before the due date of filing GST returns for September following the financial year of the invoices or debit notes. For instance, if an invoice was issued in July 2018, the ITC should be claimed by September 2019.
ii. Before the due date of filing the annual GST return for the financial year.
ITC Reversal under GST
Though ITC could be used by the registered taxable person to pay taxes out of the balance ITC available on the GST portal, if the concerned person wrongfully claims ITC or by mistake, it shall be necessary for him to reverse the ITC wrongfully claimed on the portal.
In certain circumstances, even if all the basic conditions for claiming ITC are satisfied, there may be possibilities of ITC claims being reversed. Thus, ITC reversal means that the amount of wrongfully claimed ITC shall be added to the output tax liability of the registered person after canceling the earlier claimed ITC. Sometimes even, the taxpayer may be required to pay a penal interest along with output tax liability for wrongfully claiming ITC depending upon the period within which the taxpayer reversed his ITC.
To reverse the ITC, the taxable person shall be required to self-assess the amount of ITC and fill the amount under Table 4B of the GSTR-3B form. Such reversed ITC could be reported through two ways-
i. Under Rule 42 & 43 of CGST/SGST Rules’, where the ITC is attributed to exempt or non-business supply is required to be calculated by the taxpayer using the prescribed formula as the amount shall not be auto-populated; and
ii. ‘Others’, in cases where ITC reversal is due to any other reason that is to be described and reported;
Additionally, such ITC reversal shall also be required to be reported in the yearly annual return for the financial year in form GSTR-9 with details related to all the ITC reversed throughout the year under Table 7 of the form GSTR-9. The details related to such reversed ITC and ineligible ITC will be auto-populated on the portal wherever possible.
