GST

Input Tax Credit – ITC in GST

On July 1, 2017, the day that the GST was implemented in India, the system for input tax credit was adopted. Under the GST system, businesses are allowed to deduct the taxes that they pay on their inputs (purchases) from the taxes they incur on their outputs (sales). This credit can be utilized to reduce the GST payment, hence reducing the total burden of taxes. To eliminate tax cascading by allowing seamless input tax credit (ITC) flow, discharge Indian goods and services from cost escalation due to embedded tax, and promote ease of doing business, GST was implemented.

What is Input Tax Credit (ITC)?

The integrated tax (IGST), central tax (CGST), union territory tax (UTGST), or state tax (SGST) levied on the supply of goods or services, or both, is referred to as an input tax credit under the GST system. The Goods and Services Tax provides a system called the input tax credit that enables taxpayers to claim a credit for the taxes they spent on their purchases, which they may then use to reduce the tax they owe on their sales. It simply implies that if a person who is registered under GST pays tax on their inward supplies, they can utilize this tax as a credit when paying tax on their outward supply.

Conditions for Input Tax Credit

There are some conditions which are required to be fulfilled to claim an input tax credit. The below mentioned are some of the conditions:

• The first and foremost important condition is to have a document that will act as evidence. The tax invoice should be there, which acts as evidence of the purchase and sale. It can include a bill of entry, debit notes, and invoices. All the mandatory conditions for e-invoicing should be fulfilled.
• The goods or services must have been received by the recipient.
• All the GST rules and regulations must be followed by the supplier from his end.
• The GST return must be filed by the receiver of the goods and services to claim for the ITC.
• All the information that is required for availing ITC is accumulated from the returns that are filed by the supplier. The credit can be claimed on the amount that is shown in invoices.
• The ITC claims should not be in the block or ineligible category.
• The timeline for availing the ITC should be followed strictly.
• The payment should be made within 180 days by the taxpayers to avoid the interest. 

Timelines to follow for Input Tax Credit (ITC)

• The date on which the annual return in Form GSTR 9 is filed for that financial year
• November 30 of the next financial year

Whichever of the above date is earlier is considered the deadline to claim the input tax credit.

Vital Documents for claiming Input Tax Credit (ITC)

There are some vital documents that are necessary when claiming input tax credit in GST:

1. A tax invoice is one of the most important documents when claiming the input tax credit. A registered supplier issues the tax invoice.
2. A bill of entry is the next essential document. In the case of imports, a similar document to the bill of entry can be used.
3. The registered supplier will issue a debit not in context to the previously issued invoice.
4. When the recipient of the goods or the services has paid under the RCM (Reverse charge mechanism), an invoice for the same will be issued. This invoice is also required if present.
5.  A credit note which is issued by the input service distributor.

Other documents:

1. A supplier’s duplicate GST return
2. Certificate of registration of GST of the supplier
3. In the case of shipping, a challan of delivery

Input Tax Credit (ITC) Reversal

Even when the requirements for filing an ITC claim are satisfied in some circumstances, ITC requests must be rejected. When an input tax credit (ITC) is reversed, it indicates that the credit for previously made purchases is added to the output tax liability and is, therefore, invalidated. The ITC that was previously redeemed will be revoked, along with interest, if a taxpayer fails to reimburse the supplier within 180 days of the invoice date. The reversal ITC relating to the account of exempt supplies is dealt with in Rule 43 of the CGST Rules of 2017.¹

Who can file for an Input Tax Credit?

• A registered person under GST who has fulfilled all the essential conditions
• A tax invoice or debit note should be given by the seller
• The returns are filed, and the required goods or services are acquired (Section 39 of CGST Act)
• The tax has been received by the government which was paid by the supplier
• Only after the final lot of goods or services has been delivered all the goods or services to be delivered.
• No ITC will be provided if the capital goods have been subject to depreciation.

When ITC cannot be claimed?

There are some cases in goods and services where the input tax credit cannot be claimed on them; some of them have a few exceptions. Given below is the list of goods and services on which ITC cannot be claimed, along with the exceptions:

Goods and Services	Exceptions
Goods when they are stolen
Goods when they are destroyed
Goods when they are lost
Goods that are written off
Goods when they are disposed of as free samples or gifts	According to Schedule 1 of the CGST Act, gifts to employees up to Rs fifty thousand per employee are exempted from GST. (Section 7)
When under sections 74, 129 and 130, any tax is paid	In case of misstatement, fraud, etc.
When the goods and services are used for personal use
When goods or services are received by a taxable person who is not a resident (non-taxable resident person)	With the exception of imported goods by them
When tax is paid under section 10 on goods and services or both	Composition scheme
According to Schedule 1 of the CGST Act, gifts to employees up to Rs fifty thousand per employee are exempted from GST. (Section 7)	With the exception that the goods or the services are received on his own behalf when such goods or services are used in the conduct and development of the business or as plant and machinery.
Travel benefits (LTA)
Vacation leave is given as travel benefits.
Health and Life Insurance,  Cab renting
Membership in club and fitness centre
Membership in the Health center	Exception in case when an ITC is allowed on vehicles.
Any repair, maintenance, or insurance for motor vehicle	A registered person uses an inward supply of goods or services for an outward taxable supply or as part of a taxable composite or mixed supply. ITC is accessible – in the case of beverages, food, or health cases when there is a compulsory law for employers.
Motor vehicle	Passenger transportation When used for further supply
Other conveyances	Except – when training is provided for driving, is used for goods transportation, a motor vehicle with 13+ people and the driver is used for business purposes, used for pick up and drop of employees.

Input Tax Credit in Special Cases

1. Capital Goods
   The input tax credit is offered to capital goods in some cases. ITC is not available for:

• When the capital goods are used for personal use and not for business purposes.
• When capital goods are used only for the production of goods that are exempted
• If the depreciation has been claimed on the tax component, in that case, the ITC will not be availed.

2. Transfer of Business

This is valid in situations involving company transfers, mergers, and amalgamations. At the time of the business transfer, the transferor will have an ITC that will be given to the transferee.

3. Job Work

A primary manufacturer may deliver goods to a job worker for further processing. The major manufacturer will be permitted to claim a tax credit for the purchase of such products supplied on job labour. When items are given to a job worker, ITC will be granted in both cases: From the principal’s place of business or directly from the provider of such items’ place of supply. However, in order to claim ITC, the items must be returned to the principal within one year (3 years for capital goods).

4. Input Service Distributor (ISD)

The main office, a branch office, or the registered office of the GST-registered person can all be input service distributors (ISDs). As soon as a purchase is made, ISD accumulates the input tax credit and distributes it to all receivers (branches) under various headings, such as

• CGST,
• SGST/UTGST,
• IGST, or
• Cess

Conclusion

In conclusion, with the implementation of goods and services tax, India has faced quite major changes in the tax structure of the country, which has been followed since the 1960s. Input tax credit acts as one of the main parts of the GST, which assists in eliminating the cascading effects of taxes, enhancing the effectiveness of the system of taxes in India. Input tax credits can be availed by the businesses on the taxes paid on inputs. This will help in reducing the tax burden of the businesses and will also promote compliance. To claim ITC, all the necessary rules and regulations should be followed beforehand. To avail of all the ITC benefits, businesses have to stay compliant with regulations.

Frequently Asked Questions

1. https://gstcouncil.gov.in/cgst-rules