Input Tax Credit – ITC
One of the fundamental
features of GST is
the seamless flow of input credit across the chain (from the manufacture of
goods till it is consumed) and across the country.
In this article, we
will cover the following topics-
Update as on 9th October 2019
The CBIC has notified that the input tax
credit that can be availed by a registered person in respect of invoices or
debit notes, will be restricted to 20% of of the eligible credit available in
respect of invoices or debit notes as per details uploaded by the suppliers.
1. What is input tax
credit?
Input credit means at the time of paying
tax on output, you can reduce the tax you have already paid on inputs and pay
the balance amount.
Here’s how-
When you buy a
product/service from a registered dealer you pay taxes on the purchase. On
selling, you collect the tax. You adjust the taxes paid at the time of purchase
with the amount of output tax (tax on sales) and balance liability of tax (tax
on sales minus tax on purchase) has to be paid to the
government. This mechanism is called utilization of input tax credit.
For example- you are a
manufacturer: a. Tax payable on output (FINAL PRODUCT) is Rs 450 b.
Tax paid on input (PURCHASES) is Rs 300 c. You can claim INPUT CREDIT of
Rs 300 and you only need to deposit Rs 150 in taxes.
2. Who can claim
ITC?
ITC can be claimed by
a person registered under GST only if he fulfills ALL the conditions as prescribed.
a. The dealer should
be in possession of tax invoice
b. The said
goods/services have been received
c. Returns have been
filed.
d. The tax charged has
been paid to the government by the supplier.
e. When goods are
received in installments ITC can be claimed only when the last lot is received.
f. No ITC will be
allowed if depreciation has been claimed on tax component of a capital good
A person registered under composition scheme
in GST cannot claim ITC.
3. What can be
claimed as ITC?
ITC can be claimed only for business purposes. ITC will not be available for goods or
services exclusively used for: a. Personal use b. Exempt
supplies c. Supplies for which ITC is specifically not available
All regular taxpayers must report the amount of input tax credit(ITC) in their monthly GST returns of Form GSTR-3B. The table 4 requires the summary figure of eligible ITC, Ineligible ITC and ITC reversed during the tax period. The format of the Table 4 is given below:A taxpayer can claim ITC on a provisional basis in the GSTR-3B to an extent of 20% of the eligible ITC reported by suppliers in the auto-generated GSTR-2A return. Hence, a taxpayer should cross-check the GSTR-2A figure before proceeding to file GSTR-3B. A taxpayer could have claimed any amount of provisional ITC until 9 October 2019. But, the CBIC has notified that from 9 October 2019, a taxpayer can only claim not more than 20% of the eligible ITC available in the GSTR-2A as provisional ITC. This means taht the amount of ITC reported in the GSTR-3B from 9 October 2019 will be the total of the actual ITC in GSTR-2A and the provisional ITC being 20% of the actual eligible ITC in the GSTR-2A. Hence, matching of the purchase register or expense ledger with the GSTR-2A becomes crucial.
5. Reversal of
Input Tax Credit
ITC can be availed
only on goods and services for business purposes. If they are used for
non-business (personal) purposes, or for making exempt supplies ITC cannot be
claimed . Apart from these, there are certain other situations where ITC will
be reversed.
ITC will be reversed
in the following cases-
1) Non-payment of
invoices in 180 days– ITC will be reversed
for invoices which were not paid within 180 days of issue.
2) Credit note issued
to ISD by seller– This is for ISD. If
a credit note was issued by the seller to the HO then the ITC subsequently
reduced will be reversed.
3) Inputs partly for
business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for
both business and non-business (personal) purpose. ITC used in the portion
of input goods/services used for the personal purpose must be reversed proportionately.
4) Capital goods
partly for business and partly for exempted supplies or for personal use – This is similar to above except that it
concerns capital goods.
5) ITC reversed is
less than required- This is
calculated after the annual return is furnished. If total ITC on inputs of
exempted/non-business purpose is more than the ITC actually reversed during the
year then the difference amount will be added to output liability. Interest
will be applicable.
The details of reversal of ITC will be furnished
in GSTR-3B. To
find out more about the segregation of ITC into business and personal use and subsequent calculations,
please visit our article.
6. Reconciliation
of ITC
ITC claimed by the
person has to match with the details specified by his supplier in his GST
return. In case of any mismatch, the supplier and recipient would be communicated
regarding discrepancies after the filling of GSTR-3B. Learn how to go
about reconciliation through our article on GSTR-2A Reconciliation. Please read our
article on the detailed explanation of the reasons for mismatch of ITC and procedure to be followed
to apply for re-claim of ITC.
7. Documents
Required for Claiming ITC
The following documents are required for claiming ITC: 1.
Invoice issued by the supplier of goods/services 2. The debit note issued by
the supplier to the recipient (if any) 3. Bill of entry 4. An invoice issued
under certain circumstances like the bill of supply issued instead of tax
invoice if the amount is less than Rs 200 or in situations where the reverse
charge is applicable as per GST law. 5. An invoice or credit note issued by the
Input Service Distributor(ISD) as per the invoice rules under GST. 6. A bill of
supply issued by the supplier of goods and services or both.
8. Special cases of
ITC
a. ITC for Capital
Goods
ITC is available for capital goods under
GST.
However, ITC is not
available for- i. Capital Goods used exclusively for making exempted goods ii.
Capital Goods used exclusively for non-business (personal) purposes Note:
No ITC will be allowed if depreciation has been claimed on tax component of
capital goods.
b. ITC on Job Work
A principal
manufacturer may send goods for further processing to a job worker. For
example, a shoe manufacturing company sends half-made shoes (upper part) to job
workers who will fit the soles. In such a situation the principal manufacturer
will be allowed to take credit of tax paid on the purchase of such goods sent
on job work.
ITC
will be allowed when goods are sent to job worker in both the
cases:
However, to enjoy ITC, the goods sent must be
received back by the principal within 1 year (3 years for capital goods).
c. ITC Provided by
Input Service Distributor (ISD)
An input service distributor (ISD) can be
the head office (mostly) or a branch office or registered office of the
registered person under GST. ISD collects the input tax credit on
all the purchases made and distribute it to all the recipients
(branches) under different heads like CGST, SGST/UTGST, IGST or cess.
d. ITC on Transfer
of Business
This applies in cases
of amalgamations/mergers/transfer of
business. The transferor will have available ITC which will be passed to the
transferee at the time of transfer of business.
Please visit our other articles discussing ITC
under GST in detail.