GST Input Tax Credit (ITC)

Our team of experienced professionals assists businesses in understanding the concept of input tax credit under the Goods and Services Tax (GST) regime, ensuring compliance with relevant regulations and optimizing ITC utilization Package inclusions: Assist businesses in understanding the eligibility crite..

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Overview of GST Input Tax Credit (ITC)

To prevent the cascading effect of taxes and give businesses credit for taxes paid on their purchases, the Goods and Services Tax (GST) input tax credit was implemented under the GST system. It is a fundamental idea that prevents the double taxation of products and services and ensures the smooth flow of credit throughout the supply chain. The supply chain is still active because GST is a single tax imposed across India (from the point of production of products or services to the point of sale). The same benefits are available to everyone, and credit is distributed evenly.

Before the introduction of the GST, the Indian indirect tax system imposed several taxes at various points throughout the supply chain, including excise duty, service tax, and value-added tax (VAT). Due to the cascading effect of taxes, where the tax burden would increase and raise consumer costs, these taxes were incorporated into the price of goods or services.

The method for input tax credit was put into place on July 1, 2017, the day the GST was implemented in India. Businesses can deduct the taxes they pay on their purchases (inputs) from the taxes they pay on their sales (outputs) under the GST system. The GST liability can be used to offset this credit, lowering the overall tax burden.

Credit for CGST, SGST, UTGST, and IGST input taxes

  • The following charges are included in the GST:- The Central Goods and Services Tax (CGST), commonly referred to as the Central Tax, is assessed on the supply of goods or services inside an intrastate or inter-state area.
  • State tax, commonly referred to as state goods and services tax (SGST), is imposed on providing goods and services within the same state.
  • The provision of goods or services within the same union territory is subject to the Union Territory Goods and Services Tax (UTGST), also referred to as the Union Territory Tax.
  • There is an integrated goods and services tax (IGST), also called an integrated tax, on the interstate delivery of goods and services.

These GST components' input tax credit would be permitted in the following way: -

  • The credit of CGST is first permitted for CGST payment, and the remaining amount may be used for IGST payment. For the payment of SGST, the credit of CGST is not permitted.
  • The credit of SGST/UTGST is first permitted for SGST/UTGST payment, and the remaining amount may be used to pay IGST. For the payment of CGST, the credit of SGST or UTGST is not permitted.
  • The credit of IGST is first permitted for IGST payment, followed by CGST payment and the remaining amount for SGST/UTGST payment.

Who may file for ITC?

  • A GST-registered individual may only claim ITC if they meet all requirements.
  • The dealer should provide a tax invoice,
  • The requested items or services have been obtained, and Returns have been lodged.
  • The supplier has paid the government the tax that was assessed.
  • When items are delivered in lots, ITC can only be claimed after the last lot is delivered.
  • If depreciation has been claimed on the capital good, no ITC will be permitted.
  • ITCs cannot be claimed by individuals registered under the GST composition scheme.

What can be claimed as ITC?

ITC can only be used for commercial endeavors. For products or services solely used for one of the following:

  • Personal use
  • Exempt supplies
  • Supplies for which ITC is expressly not available

How to claim ITC?

In their monthly GST reports on Form GSTR-3B, average taxpayers must provide the amount of their input tax credit (ITC). The total of qualified ITCs, ineligible ITCs, and ITCs reversed throughout the tax period are required in Table 4. To the extent of 20% of the eligible ITC reported by suppliers in the automatically generated GSTR-2A return, a taxpayer may claim ITC in GSTR-3B. Therefore, before submitting GSTR-3B, a taxpayer should double-check the GSTR-2A figure.

Until October 9, 2019, a taxpayer might have claimed any amount of the provisional ITC. However, the CBIC (Central Board of Indirect Taxes and Customs) has announced that beginning on October 9, 2019, a taxpayer may only claim up to 20% of the available valid ITC on the GSTR-2A as a provisional ITC. As a result, the provisional ITC equals 20% of the actual eligible ITC in GSTR-2A, and the ITC reported in GSTR-3B as of October 9, 2019, will be the sum of the actual ITC in GSTR-2A. Therefore, matching the GSTR-2A with the expense ledger or purchase register becomes essential.

Reversal of Input Tax Credit

ITC is only available for products and services used for business. ITC cannot be claimed if they are utilized to make exempt supplies or for non-business (personal) reasons. In addition, there are a few other circumstances in which ITC will be reversed.

The information on the ITC reversal will be provided in GSTR-3B.

In the following scenarios, ITC will be reversed:

  • When invoices are not paid within 180 days of issuance.
  • The vendor issued an ISD credit note, i.e. for ISD. The ITC that was subsequently decreased will be reinstated if the seller provides the HO with a credit note.
  • Inputs firms use for business and non-business (personal) reasons, with a portion of the inputs used for exempted supply or personal usage. ITC must be proportionately reversed when utilized as an input for goods or services used for personal consumption.
  • Capital goods are partially used for business purposes and partially for personal use or exempt supplies - This is similar to the previous statement except that it refers to capital goods.
  • ITC reversed, as determined when the annual return is provided, is less than needed. The difference will be applied to output liabilities if the total ITC on exempted/non-business purpose inputs is more than the total ITC reversed during the year, and the interest will be relevant.

Reconciliation of ITC

ITC claims must correspond to the information of the person provided in his GST return. Following the completion of GSTR-3B, any differences will be communicated to the supplier and beneficiary.

For claiming ITC, the following necessary papers are necessary:

  • A bill presented by the provider of goods or services
  • The debit note (if any) that the supplier has issued to the recipient bill.
  • An invoice is issued when specific conditions are met, such as when the amount is less than Rs 200.
  • The reverse charge is in effect under GST law, in which case a bill of supply is sent instead of a tax invoice.
  • A credit note or invoice provided by the input service distributor (ISD) following the GST invoice guidelines.
  • A bill of supply for products and services or both issued by the vendor.

Conditions to claim an input tax credit under GST

The requirements for GST-registered buyers to claim ITC are outlined in Section 16 of the CGST Act. The terms are as follows: Such input tax credit is claimable if purchased items, or services are employed for commercial, not domestic, reasons.

  • The tax invoice, debit note, or other necessary paper proving payment for the purchase must be kept by the buyer.
  • The supplier submits such tax invoices or debit notes in Form GSTR-1, which the customer receives in Form GSTR-2B.
  • According to Section 16(2)(aa), the benefit of temporary ITC claims will end on January 1, 2022. It implies that the ITC reported in GSTR-3B will equal the ITC recorded in GSTR-2B. There will no longer be a provisional ITC of 5% of the actual ITC in GSTR-2B. Therefore, it's critical to consistently match the GSTR-2B with the purchase register or cost ledger. Regular taxpayers had until December 31, 2021, to claim provisional ITC in GSTR-3B up to 5% of the ITC available in GSTR-2B and ITC in GSTR-2B.
  • The goods and services have been delivered to the buyer. The delivery of the products by the supplier to the buyer, the buyer's agent, or another person specified in a necessary paper transferring title to the goods constitutes a receipt. On the other hand, if the provider provides the requested services to the customer or another individual, that is considered receiving the services.
  • The buyer is required to submit Form GSTR-3B with their GST returns.
  • When the last lot or instalment of goods is received in cases where they are delivered in lots or instalments, ITC becomes available.
  • After the invoice date, the customer has 180 days to pay for the goods and services received. If not, they must be paid to the government along with any applicable Section 50 interest, according to prior ITC guidance. Another ITC claim may be made after the provider has been paid.
  • No ITC will be allowed if depreciation has already been claimed on the tax part of a capital good acquisition.
  • The GST provisions, described in the following section, stipulate a deadline within which ITC on a tax invoice or debit note from a financial year must be claimed.
  • As it is used in conjunction with the sale of taxable and tax-exempt goods and business and non-business supplies, the standard ITC credit must be distinguished and divided.

Time restriction for GST input tax credit claims

The deadline for filing an ITC claim against an invoice or debit note is two dates sooner than those listed below:

  • November 30 in the following fiscal year.
  • The deadline for submitting Form GSTR-9 annual returns for that fiscal year. For instance, a buyer, XY firm, seeks to claim GST paid on a purchase made with an invoice dated December 8, 2021 (FY 2021–2022). The two dates are as follows following the standards established to determine the time limit:
  • November 30, 2023.
  • The deadline to submit the GST annual return for the fiscal year 2022–2023 is December 31, 2023.

Service offered by Enterslice

Enterslice can provide the following services related to GST input tax credit:

  • Eligibility Evaluation: Enterslice can determine if you can claim an input tax credit using the pertinent information of the GST law. Your purchase invoices will be examined to ensure they are eligible for the credit.
  • Maintaining Proper necessary paperation and Records: Enterslice can help you keep accurate records of your purchases, including invoices, receipts, and other supporting papers. This is essential when supporting your claims for input tax credits during GST audits or assessments.
  • Review of Compliance: Enterslice can thoroughly analyze your GST compliance procedures to find any flaws or potential areas for development regarding the input tax credit. They can assist you in establishing reliable procedures that will guarantee a correct and prompt claim of an input tax credit.
  • Reconciliation: To ensure you have gotten the credit for all eligible transactions, Enterslice may assist you in reconciling your purchase records with the appropriate supplier's sales records. Any discrepancies or unaccounted-for credits can be found using this reconciliation technique.
  • Support for GST Audits: If you are the subject of a GST audit by the tax authorities, Enterslice can offer assistance by helping you with the Paper works and representation during the audit. They can assist when the auditors have questions or reservations about your input tax credit claims.

Frequently Asked Questions

Only those with a GST registration and those who submitted GSTR 2 returns can receive the input tax credit. The tax invoice or the debit note issued by the input supplier or services should be in the dealer's possession.

For items that are misplaced, stolen, destroyed, written off, or given away as presents or free samples, there is no ITC available.

 

  1. i) A non-resident taxpayer's use of goods or services, or both, is only eligible for an ITC if the taxpayer imported the products in question.
  2. ii) A person paying tax under the GST composition scheme would not be eligible for an ITC. Will tax paid in interest, penalties, or fines continue to be unaffected by this?

The ITC is deducted in the following way: -

  • Deduct first the IGST and then the remaining CGST/SGST in the appropriate proportion.
  • Start with the CGST and the remaining with the SGST.
  • Finally, the remaining IGST tax credit is offset against the SGST.

The provisional ITC shall be at least 20% (up from 10%) of the qualified ITC for a given month. Therefore, only Rs. 10,000 shall be claimed if the provisional ITC the recipient intends to claim is Rs. 10,000, and the provisional ITC calculated per Rule 36s(4) comes to Rs.

 

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