GST Input Tax Credit

Understanding GST Input Tax Credit and How to Claim It

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.

Introduction to GST Input Tax Credit

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? 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.

        Outward GST payable

      Rs. 4320

       Less – GST paid on purchase

      Rs. 3600

 

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.

 

Need for Input Tax Credit

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?

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.

 

How to Claim Input Tax Credit?

The GST tax structure allows businesses and taxpayers across India to claim GST Input Tax Credit for the tax they paid while purchasing good or raw materials for their establishment. Under the GST scheme, the following conditions have to be met to claim ITC:

  • Must be registered as taxable entity or person
  • 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 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 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.

 

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.

 

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.

 

Similarly, the amount of Input Tax Credit on account of IGST shall first be utilized for the payment of IGST, then for 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

Under what conditions does the ITC get Reversed?

 

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

 

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

 

Deadline for claiming ITC

 

Input Tax Credit under 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

 

FAQs related to ITC

 

What is input tax credit under GST?

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.

 

What conditions have to be met to claim input tax credit under GST?

As per the rules of the GST act, the conditions to claim input tax credit are:

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

 

If GST is paid on reverse charge, can that be considered as input tax?

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

 

What is the time limit to claim ITC within which the recipient needs to pay the taxable value to the supplier of service?

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

 

Does input tax include the tax paid on input goods, services and capital goods?

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

 

What is the eligibility of GST input tax credit on inputs in stock for a taxpayer who obtains voluntary registration?

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.

 

Is GST input tax credit on capital goods allowed in one instalment?

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.

 

 

Read More

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2) Advantages and Disadvantages of GST for Business, SMEs and Consumers

3) E invoicing: Applications, Advantages, Procedures & FAQs

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