GST Input Tax Credit

GST Input Tax Credit & How to Claim ITC in GST

Learn about GST Input Tax Credit (ITC), its features, steps to claim it, documentations required, the due date for ITC, and calculate ITC by yourself.

Table of Content

  • What is Input Tax Credit under GST?
  • GST Input Tax Credit – The Working Mechanism
  • The Need for Input Tax Credit in GST
  • How to Calculate Input Tax Credit in GST?
  • How to Claim Input Tax Credit in GST?
  • Conditions for Claiming Input Tax Credit under GST

GST Input Tax Credit for SGST 

GST Input Tax Credit for CGST 

GST Input Tax Credit for IGST & UTGST

  • Documentations Needed for Input Tax Credit
  • Allowance & Disallowance of Input Tax Credit
  • The Reversal of ITC under GST

Supply from an Unregistered dealer to a Registered dealer

Services via e-commerce platform

Supply of certain Goods and Services specified by CBIC

  • ITC Excess Refund

ITC Refund Under Two Special Cases:

  • ITC Under Special Cases

Job Work

Input Service distributor (ISD)

Pipelines and Telecommunication Tower

Bank and Financial Institutions

  • Deadline for claiming ITC
  • Points to Remember While Availing ITC
  • Latest News and Trends - GST Input Tax Credit
  • To Conclude: Can I Avail ITC for Products Bought on Amazon Business?
  • FAQs

 

What is Input Tax Credit under GST?

Input Tax Credit under the GST regimen is the credit that any business can claim on the GST they have paid on the purchase of goods and services. The entire Input Tax Credit system is one of the major highlights of the GST Act. GST is a single tax that subsumes other indirect taxes and is levied across the country, right from the manufacturing of goods till it reaches the final consumer. Hence, everybody in the chain can take the benefit of this system, creating a seamless flow of credit. So how does the GST Input Tax Credit actually work?

 

GST Input Tax Credit – The Working Mechanism

Let’s take the below example to know its mechanism.

ABC Business purchased goods worth Rs. 20,000 on which GST @ 18% was Rs. 3600. They sold goods worth Rs. 24,000, on which GST payable @ 18% was Rs. 4320. Now let’s calculate and understand the net GST payable and the input GST credit.

 

       GST collected on Outward Supply

      Rs. 4,320

       Less – GST paid on purchase

      Rs. 3,600

 

Therefore, the net GST payable is Rs. 4320 minus Rs. 3600, which is Rs. 720. Hence, what we need to understand here is that amount of Rs. 3600 that was reduced in the Input Tax Credit availed by ABC Business that they had paid on the purchase of goods.

For those who don’t know, outward GST is levied on outward supply. When a business sells its product, it is called outward supply. And the GST collected from outward supply is called outward GST.

 

The Need for Input Tax Credit in GST

Before the GST regime came into effect, there were different indirect taxes levied at different stages of any business. This led to a cascading effect i.e., tax imposed on tax paid at an earlier stage. To avoid this challenge of “tax on tax”, the GST Input Tax Credit system was introduced into the GST Act.

 

Input Tax Credit refers to deducting the tax paid on inputs from the tax payable on the final output. This means as a recipient of input services or inputs, a taxpayer can deduct the tax amount on inputs or input services against the tax on their output.

 

How to Calculate Input Tax Credit in GST?

To better understand how GST Input Tax Credit is calculated, let us consider the below example:

XYZ Enterprises is involved in the business of manufacturing household plastic products like plastic chairs and tables, plastic storage containers, etc. Assume they had bought plastic worth Rs. 600 to manufacture a set of 4 chairs and other raw materials worth Rs. 200. Let’s assume that the GST for plastic is 18% and GST for other raw materials is 28%. Hence based on these rates, XYZ Enterprises would have paid GST of Rs. 108 on raw plastic and Rs. 56 on other raw materials which they used as inputs. Hence, the input tax paid by XYZ Enterprises was Rs. 164 (Rs. 108 + Rs. 56).

 

After considering the manufacturing cost, labour, and including a decent profit, XYZ Enterprises decided to sell the set of 4 chairs to a distributor at Rs. 1200 + GST. Assume that the GST for plastic products is 18%. So, the GST on it would be Rs. 216. Hence, XYZ Enterprises will invoice the set of chairs for Rs. 1416 (1200+216). Here, XYZ Enterprises is collecting Rs. 216 from the distributor, as GST on sale.

 

XYZ Enterprises had paid Rs. 164 towards GST during the purchase of input raw materials. Hence, out of Rs. 216 of GST from the sale, XYZ Enterprises can now claim a credit of Rs. 164 that they had already paid as GST for inputs, and then deposit the difference of Rs. 52 with the government. This tax credit is available at all the stages of the business where retailers and distributors charge GST and then claim the Input Tax Credit.

Before knowing how to claim Input Tax Credit, let’s learn how to register for GST.

 

How to Claim Input Tax Credit in GST?

The GST tax structure allows businesses and registered persons across India to claim GST Input Tax Credit for the tax they paid while purchasing good or raw materials for their establishment. To Claim Input Tax Credit or ITC, one needs to fulfil certain conditions.

 

Conditions for Claiming Input Tax Credit under GST:

 

  • Must be GST registered person or a taxable entity under GST
  • Good and Services received is used for business purposely only
  •  ITC can be claimed on zero-rated supplies or exports and are taxable.
  • For a registered taxable entity, the unused ITC shall be transferred to the merged business in case of merger, sale or transfer of business.
  • All supporting documents like debit note, tax invoice, supplementary invoice, receipt of goods and services must be available
  • All GST returns such as GST-1, 2,3, 6, and 7 needs to be filed

 

All registered persons (GST taxpayers) must report the amount of ITC in their monthly GST return filing Form GSTR-3B. A taxpayer can claim ITC on a provisional basis in the GSTR-3B to the extent of 5% of the total ITC available in the auto-generated GSTR-2B for that month. Hence, a taxpayer or registered person should cross-check the GSTR-2B before proceeding to file GSTR-3B. The ITC shall be available based on the sellers' invoices in their GSTR-1 or via the Invoice Furnishing Facility.

 

GST Input Tax Credit for SGST 

The amount of ITC on account of SGST must be first utilized to pay SGST and then for IGST payment. This amount cannot be used for payment of CGST. The ITC of SGST has to be calculated state-wise, which means ITC of SGST in one state cannot be utilized for payment of SGST of another state. Additionally, ITC cannot be used to make interest payments, penalties, fees or any other amount payable other than the GST.

 

GST Input Tax Credit for CGST 

Input Tax Credit on account of CGST shall first be utilized for the payment of CGST, then for payment of IGST. This amount cannot be used for payment of SGST or UTGST.

 

GST Input Tax Credit for IGST & UTGST

The amount of Input Tax Credit on account of IGST shall first be utilized for the payment of IGST, then for the payment of CGST and finally for payment of SGST or UTGST.

How to claim Input Tax Credit

Documentations Needed for Input Tax Credit

Under the GST scheme, taxpayers will require the following documents to claim ITC:

  • Invoice provided by the supplier of goods and/or services
  • Bill of Entry or a similar document issued by the Customs Department
  • Bill of Supply issued by the supplier
  • Invoice issued similar to Bill of Supply, if the total amount is less than Rs. 200 or where reverse charge is applicable
  • Any debit note issued by the supplier
  • Document issued by ISD as per the invoice rules under GST
Documentation needed for  Input Tax Credit

Allowance & Disallowance of Input Tax Credit

Any business or business holder, registered under the GST Act, can claim the input tax credit. However, there are certain circumstances under which the ITC can be denied or disallowed.

Here is a table explaining the disallowance and allowance of input tax credit –

 

Table
Sectors

Input Tax Credit allowed, if

Motor Vehicles &

other Conveyance

They are supplied in the normal course

of business or are used for providing the

following taxable services:

 

Transportation of Passengers

or

Transportation of Goods

or

Imparting Training on Motor Driving Skills

Rent-a-Cab service,

Health Insurance and

Life Insurance

If it’s a government-mandate for the

employers to provide it to their employees

In cases where the goods and/or services

are taken to deliver the same category of

services or as a part of composite supply

Works Contract Services,

when supplied for the

Construction of Immovable

Property

Works Contract Services supplied for

Construction of Plant & Machinery

 

One Works Contract Service is input

for another works contract service

Further,

Goods/ Services received by a Non-Resident Taxable person are disallowed any ITC unless the NRI is a taxable person

ITC is not allowed on food & beverages, outdoor catering, beauty treatment, health services, cosmetic & plastic surgery unless these are taken to deliver the same category of services or as a part of composite supply

 

The Reversal of ITC under GST

 

Under the GST scheme, the supplier of goods and/or services pays tax on supply. However, in the case of Reverse Charge, the chargeability gets reversed, i.e., the receiver becomes liable to pay the tax. There are three instances when the reverse charge mechanism comes into play.

 

Supply from an Unregistered dealer to a Registered dealer

 

When a seller, not registered under GST, supplies goods to an entity or individual registered under GST, then Reverse Charge would apply. In such a scenario, GST will be paid by the receiver to the Government, not to the supplier, and the registered dealer has to self-invoice for the purchases made. For inter-state purchases, the buyer has to pay IGST, while for intra-state purchases, the buyer has to pay CGST and SGST under RCM.

 

Services via e-commerce platform

 

When an e-commerce operator supplies services, reverse charge will be applicable to the e-commerce operator. For example, some e-commerce platforms provide services of electricians, plumbers, painters, etc. Such e-commerce platforms are liable to pay GST and collect it from the customers instead of the registered service providers. In a scenario where the e-commerce operator does not have a physical presence in the state where they have provided the services, they must have a representative or should appoint a representative who has to be held liable to pay GST.

 

Supply of certain Goods and Services specified by CBIC

 

list of goods and services has been issued by the Central Board of Indirect Taxes and Customs on which reverse charge is applicable.

 

ITC Excess Refund

For accumulated input tax credit refund, the taxpayer must satisfy certain conditions. As per Section 54 of the CGST Act read with Rule 89 of the CGST Rules, the applicant must file the RFD-01 form and furnish the necessary documents within the same tax period.

Further, Rule 89(2) (h) of CGST Rules, 2017 stipulates that refund claim on account of accumulated ITC (where such accumulation is on account of inverted duty structure) has to be accompanied by a statement containing the number 323 and date of invoices received and issued during a tax period.

In addition, Rule 89(3) of CGST Rules, 2017 also provide that where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant in an amount equal to the refund so claimed.

With all that said, the refund of unutilized input tax credit is only allowed in the following cases –

 

ITC Refund Under Two Special Cases:

Zero rated supplies made without payment of tax:

As per Section 16(3) of the IGST Act, 2017, a registered person making zero rated supply is eligible to claim refund under either of the following options, namely:

Supply of goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit.

Or

Supply of goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.

The first category pertains to refund of unutilized ITC for which the registered person has to supply under Bond/LUT (as prescribed in Rule 96A of CGST Rules) and in the second category supply has been made after payment of Tax (IGST). In both the cases, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 or Rule 96, as the case may be, of the CGST Rules, 2017.

Inverted duty structure:

Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.

 

ITC Under Special Cases

ITC on GST cannot be claimed on two types of capital goods.

Capital goods used in the production of exempted goods

Capital goods used for non-business/ personal purposes

What are capital goods?

Capital goods are buildings or machinery, equipment or vehicles that are part of the business or help product the main product. For instance, oven is a capital good for a cake making company.

Since these are depreciating assets and cannot be consumed over just one year, claiming input credit on capital goods gets a little tricky. If you claim depreciation on GST paid at the time of purchasing the capital asset, you cannot claim input tax credit.

There are some special cases of ITC –

 

Job Work

Section 2(68) of the CGST Act, 2017 defines job work as ‘any treatment or process undertaken by a person on goods belonging to another registered person’. The one who does the said job would be termed as ‘job worker’. The ownership of the goods does not transfer to the job worker but it rests with the principal (the person with GST registration). The job worker is required to carry out the process specified by the principal, on the goods.

Section 19 of the CGST Act, 2017 provides that the principal shall be entitled to take the credit of input tax paid on inputs sent to the job- worker for the job work. Further, the proviso also provides that the principal can take the credit even when the goods have been directly supplied to the job worker without bringing into the premise of the principal. The principal need not wait till the inputs are first brought to his place of business.

 

Input Service distributor (ISD)

For offices or business having multiple branches in different states, claiming the input tax credit becomes a hassle. Input service distributor, such cases, collects the input tax credit and distributes it among all the branches across states. It distributes the credit basis the invoices. ‘

 

Pipelines and Telecommunication Tower

As per section 17(5) of CGST Act, 2017, works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract.

It was not clear whether the credit of input tax in respect of pipelines laid outside the factory and telecommunication towers be considered as an immovable property. The cloud was cleared when M/s. Western Concessions Private Limited, engaged in regasification of Liquified Natural Gas, raised an issue regarding claiming the ITC on laying of pipelines.

The Authority for Advance Ruling (AAR) clarifies that pipelines do not qualify as ‘plant and machinery’ under Explanation to Section 17(5) of the CGST Act.

 

Bank and Financial Institutions

Banks and financial institutions can apply for the ITC on tax paid on inputs or input services referred to in the second proviso to sub-section (4) of section 17 and not covered under clause (a). Banks and financial institutions can only claim the 50% of the total ITC available in each month, and it should be furnished in GSTR-2.

 

Deadline for claiming ITC

Input Tax Credit in GST can be claimed only for tax invoices and debit notes that are less than a year old. In any other scenario, the last date to claim ITC is:

  • Before filing valid GST returns for the month of September, following the end of the financial year that is applicable to that particular GST invoice. So, for an invoice issued on June 26, 2020, ITC should be claimed by September 2020.
  • Before filing a relevant annual return

 

Points to Remember While Availing ITC

  • Buyer should pay the seller for the supplies received within 180 days from the date of issuing the invoice
  • Failing to do so, the amount of credit availed, will be added to the output tax liability
  • Once amount due is paid to the supplier, the buyer can avail ITC
  • In case where partial payments are made, credits proportionate to the payment can be availed
  • The buyer must possess a valid tax invoice, debit note, or other prescribed document
  • The buyer must have received the goods or service. If received in instalments, then ITC can be claimed against the tax invoice for the last instalment
  • The tax due on the buyer’s purchase must have been paid by the supplier to the government either by claiming Input Tax Credit or in cash

 

Latest News and Trends - GST Input Tax Credit

Here are some of the important links that will inform readers about the latest news and press release about the GST norms.

 

 Latest GST update from the Government

 Availability of Input Tax Credit (ITC) for FY 2020-21

 

To Conclude: Can I Avail ITC for Products Bought on Amazon Business?

The Input Tax Credit is one of the top benefits of buying from Amazon Business. Since all products listed are available with GST Invoices, business owners with GST registration can claim the Input Tax Credit on GST and save up to 28% on their purchases.

These benefits are available for bulk orders as well. Such convenience makes Amazon Business the best wholesale online marketplace in India.

 

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FAQs

  • In simple language, Input Tax Credit or ITC means that when manufacturers pay tax on their output, they can deduct the tax they paid earlier on the inputs (raw materials) they bought to manufacture their product.

  • As per the rules of the GST act, the conditions to claim Input Tax Credit are:

    • The receiver must have a tax invoice or debit note or any other similar type of documents
    • Goods and/or services have been received by the recipient
    • Supplier has paid the appropriate tax to the government
    • Monthly return is furnished within the stipulated time by the receiver
  • 180 days.

  • Yes. As per the GST Act, input tax includes the tax payable under the reverse charge.

  • The maximum time limit within which the recipient needs to pay the taxable value to the supplier of service is three months.

  • Yes, input tax includes all taxes paid on input goods, input services and capital goods.

  • A taxpayer who obtains voluntary registration is entitled to take the Input Tax Credit on inputs in stock, finished goods, and semi-finished goods, held on the day immediately preceding the date of registration.

  • Yes, GST Input Tax Credit under GST can be claimed for capital goods in one instalment except for pipelines and telecommunication towers fixed to earth.

  • Any business owner or company who is registered under the GST is eligible for input tax credit. However, there are some exceptions and special cases. Please read this article to know in detail.

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