Input tax credit under Goods and Service Tax(GST)

Input tax credit

GST input tax credit: Input tax credit (ITC) in simple meaning means taking the benefit or deduction of tax paid on inward supplies that are the purchase of inputs of goods, capital goods, and input of services against the taxes payable under the GST Act.

The outward supplies of goods on which taxes may be payable under forwarding charge or reverse charge or IGST on import of goods by every registered dealer but not the composite dealer.

Where two branches under two different states will be considered as two separate Persons and cannot use the ITC of each other.

Let’s take one example where the GST payable on the supply of the final output of a manufacturer is Rs. 500 and the GST paid on inputs is Rs. 300. In such a case, the manufacturer can claim the Rs. 300 GST paid as ITC. This brings the net tax payable at the time of supply down to Rs. 200 only (Rs. 500 – Rs. 300). This way, the cascading effect of taxation is prevented.

Types of input taxes

 

  • > CGST, SGST, UTGST and IGST.
  • > IGST on import of goods.
  • > Tax payable under the reverse charge of CGST, SGST, UTGST, and IGST.

Who can Claim Input Tax Credit?

Input Tax Credit (ITC) is available only to those businesses/individuals who have registered under the GST Act.

This in effect means that ITC can be claimed by a wide range of businesses/ Individuals including but not limited to service providers, aggregators, e-commerce operators, agents, suppliers, and/or manufacturers. In all the above cases, input tax credit claims can be made by the GST registered business/individuals on tax paid for the purchase of any business relevant inputs.

Input Tax Credit Eligibility

There are some criteria that  GST registered businesses/individuals need to fulfill in order to be eligible for an input tax credit under current GST rules:

  • >Availability of GST invoice showing details of tax paid is mandatory
  • > The goods on which GST has been paid have been received
  • > Applicant has submitted the relevant tax returns
  • > The supplier of the goods has paid the due tax to the government
  • > ITC applicant is registered under GST
  • > If goods have been received in installments, ITC can be claimed only after the final lot has been received

 

The input tax credit cannot be claimed in the following cases 
  • > Composition tax registered businesses/individuals paying GST on inputs
  • > If depreciation has been claimed on the tax component of a capital good
  • > On goods not used as business inputs such as supplies for personal use
  • > On goods on which ITC is not applicable under the GST Act such as exempt supplies

Input Tax Credit Reversal

In some cases, ITC that has been credited to the credit ledger of a registered business/individual may be reversed. The following are some reasons why the reversal of input tax credit may occur:

  • > ITC reversal can occur if invoices are not paid within 180 days counted from issue date
  • > In the case of ITC claims by ISD, a reversal can occur if credit note is issued by the supplier
  • > In case supplies are used for both business and non-business purposes, ITC reversal may be applicable in proportion to non-business usage of such supplies. The same may apply for ITC on capital goods used for both business and non-business purposes.
  • > If total ITC claimed on inputs exceeds the actual input tax credit reversed, then the balance amount is reversed.

The details of the reversal of input tax credit are furnished through GST Return.

Calculate Input Tax Credit

For cotton yarn purchases of Rs. 10,000 the GST paid by ABC Textiles to XYZ = 5% of Rs. 10,000 = Rs. 500. (This is the amount that can be claimed as ITC by ABC textiles.)

For readymade garments sold worth Rs. 20,000 the GST payable (for the relevant period) = 12% of Rs. 20,000 = Rs. 2400.

Thus by claiming back ITC on the purchase of cotton yarn from XYZ enterprises, the effective GST payable by ABC Textiles would be Rs. 2400 – Rs. 500 = Rs. 1900.

Where credits can be taken?

The credit of ITC can be taken in the electronic credit ledger. Electronic credit ledger is an input credit ledger in electronic form at the electronic common portal for each registered person and it is self-assessed.

Which taxes can be paid using ITC?

Every output tax under GST can be paid by ITC except the tax payable under reverse charge mechanism RCM.

RCM and ITC
  • RCM In simple means ITC that cannot be used to pay the tax payable under RCM but tax paid under RCM can be used as ITC.

MANNER IN WHICH ITC CAN BE USED FOR THE PURPOSE OF SET-OFF

 (RULE 88A) ITC on account of IGST will first be utilized towards the payments of IGST and thereafter remaining amount if any shall be utilized for the payment of CGST, SGST, or UTGST in any order. The rule provided that ITC on account of CGST, SGST, or UTGST may be utilized to make a set-off of IGST, CGST, SGST, or UTGST only after the complete utilization of IGST.

ITC on account of CGST will first be utilized to make a payment of CGST and thereafter balance if any will be utilized to make a payment of IGST.

ITC on account of SGST or UTGST will firstly be utilized to make a payment of SGST and thereafter balance if any will be utilized to make a payment of IGST.

Important points
  • > The ITC of CGST cannot be utilized for SGST or UTGST
  • > ITC of SGST or UTGST cannot be utilized to make a payment of CGST
  • > The ITC of IGST can be utilized after the payment of IGST for CGST, SGST or UTGST in any manner
  • > ITC of CGST, SGST or UTGST will be applied only after the complete utilization of ITC of IGST
The time limit for availing ITC

ITC on invoice relating to a financial or debit notes relating to a financial year can be availed any time till the earlier of the following dates

  • Due date of filing of the return for the month of September of the succeeding financial year or date of filing of the relevant annual return

Or

  • 31-December following the end of the financial year

Example: for the financial year 2018-19 annual return has to file by 31- 12-19

  • As per sec 39, every registered taxable person is required to file return in the prescribed form by 20 of the following month (next month) for e:g return for the month of September is required to be filed by 20th

Therefore the credit thereof shall be availed by 30th September and declare in return.

Note: “This document had been written to provide update in simple/ lucid language. The Author shall not be responsible for any decision made based on the content of this document. Care has been taken to produce authentic and reliable information, however the users are expected to obtain professional advice before implementing.

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