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Introduction

GST has been considered one of the most revolutionary economic reforms in India in recent times. It is now applied all over the country with millions of businesses adapting to this new age tax regimen.

One of the highlights of GST is the ‘Input Tax Credit’ calculation. In simple terms, Input Tax Credit (ITC) allows businesses to reduce the tax liability by taking into consideration the tax you have already paid on purchases.

There are specific guidelines on calculating ITC while submitting your GST returns. This article elaborates on the ways to calculate your ITC, how to claim it, and situations where you cannot claim it.

What is Input Tax Credit (ITC)?

Input Tax Credit can be considered as a type of tax rebate you get for the taxes you have already paid on your purchases.

ITC eliminates the cascading effect of taxes, or simply put, it removes ‘tax on tax’. ITC is one of the most significant aspects of the GST system. Under this tax structure, the whole supply chain will be subject to GST imposed at the same time by the central and state governments. Although the tax levied by the central or state governments would be part of the same tax regime, the tax credit collected at one stage would be available as a set-off for the payment of the tax at each following stage.

One of the main goals of GST was to eliminate the cascading impact of taxation that occurred under Excise, VAT and Service Taxes. GST input tax credit allows taxpayers to claim it irrespective of their business location, making it easier for products to be marketed and imported all through the country.

What are the taxes that can be claimed under ITC?

4 types of taxes under GST can be claimed under ITC:

  • Integrated GST (IGST)
  • Central GST (CGST)
  • State GST (SGST) / Union territory GST (UTGST)
  • GST Compensation Cess

Who can claim Input Tax Credit?

For a company to settle tax obligations, GST input tax credit requirements are very important. Tax Credit does not extend to any type of inputs, and various laws and regulations may apply to each state or region. Input tax credit is also applicable for a dealer who has bought products for reselling.

  • The primary requirement is that the individual is registered under GST
  • He should have a valid tax invoice of purchase or debit note issued by registered dealer
  • Should have received the goods / services
  • The tax he paid for his purchases has been deposited / paid to the government by the supplier in cash or via claiming input credit
  • Supplier should be GST compliant and should have filed his GST returns

How to avail Input Tax Credit?

In respect of IGST, CGST, SGST & UTGST, the tax charged when the products are on hand, goods are ordered, services are received, goods are imported into the market, capital goods are acquired can be taken as input tax credits, while output tax is being calculated.

To Pay IGST

Take Input Tax Credit from taxes paid towards CGST, SGST/UTGST, and IGST

To Pay CGST

Take Input Tax Credit from taxes paid towards CGST and IGST

To Pay SGST/UTGST

Take Input Tax Credit from taxes paid towards SGST/UTGST and IGST

Note: 

In the first instance, ITC in IGST has to be entirely used before ITC in CGST/SGST is used.

In the case of CGST liability, CGST credit is to be used first and then IGST credit. However, it must be taken into account that no IGST credit is pending

In the case of SGST liability, SGST credit is to be taken first and then IGST credit. However, it must be taken into account that no IGST credit is pending

CGST credit cannot be used to cover SGST liability and vice versa, SGST credit cannot be used to offset CGST liability.

The primary goal at the time of setting off an input tax credit against tax liabilities is to have a certain amount of tax collected after all the provisions of the Act have been complied with.

What are the forms used to apply for Input Tax Credit?

There are 4 different ITC Forms; 

ITC 01 – ITC for new GST Registration

This form is used when: 

  • Request for registration of the GST shall be made within 30 days of being liable for payment of the GST
  • Anybody decides to enrol voluntarily
  • Any person wishes not to join the composition scheme, but stays registered as an ordinary taxpayer
  • An existing exempted source is converted to a taxable supplier of goods/services

ITC 02 – Transfer of ITC in case of sale/merger etc.

  • A registered taxpayer may apply for the transfer of the corresponding ITC to another business entity in the event of a transfer of business by way of sale of business/fusion/demerger by filing an ITC declaration in the form ITC-02.
  • Any acquired entity must file an ITC declaration for the transfer of an ITC in the ITC-02 form.
  • The ITC shall be divided into the ratio of the valuation of the properties of the new units as defined in the demerger scheme.

ITC 03 – Reversal of ITC

Form ITC 03 is to be filed when: 

  • Taxpayers choose to enrol under the scheme of composition from the standard scheme
  • Taxable supply becomes an exempted supply 

ITC 04 – ITC on goods sent to Job Worker

Form ITC -04 is filed by the taxpayer who sends goods to the job worker. It includes taxpayer whose:

  • Goods are dispatched to a job worker
  • Goods are received from a job worker
  • Goods are sent from one job worker to another

Special circumstances where ITC can be claimed

Section 18 of the CGST Act allows for a few special circumstances where input tax credit may be claimed –

  • Availability of an input tax credit in the event of compulsory enrolment.
  • Availability of an input tax credit in the event of voluntary enrolment.
  • Availability of an input tax credit as the enrolled individual ceases to apply to a composition scheme.
  • Availability of an import tax credit in the event of exempted supplies being taxable.
  • Availability of an import tax credit in the event of a reform in the constitution

Good & Services ineligible for claims under Input Tax Credit

Section 17(5) of the CGST Act, 2017 applies a few exemptions to claim Input Tax Credit:

  • Motor vehicles and other forms of transport except under specified circumstances.
  • Goods and/or services offered in conjunction with the following:
    • Food and drinks, outdoor catering, beauty treatment, health facilities, dental and plastic surgery, except under some circumstances;
    • Membership in the club, health and fitness centre;
    • Rent-a-cab, life insurance, health insurance, except where it is technically binding on the employer;
    • Travel incentives provided to workers on vacation, such as leave or home travel concessions;
  • Works contract services when provided for the building of immovable land, rather than plant and equipment, except where it is an input facility for the further provision of work contracts;
  • Goods or services obtained by a taxable person for the building of immovable property on his own behalf, rather than plant and equipment, even when used in the course of business or in favour of business;
  • Goods and/or services on which tax has been collected under the composition scheme;
  • Goods and/or services used for private or personal use to the degree that they are consumed;
  • Missing, lost, destroyed, written off, gifted, or free samples of goods;
  • Any tax charged for short payment on account of theft, suppression, mis-declaration, arrest, imprisonment.

Time limits to apply for Input Tax Credit

Input Tax Credit has to be availed earlier than one of the below two dates:

  • Due date of GST return filing for the month of September of the next financial year
  • Date of filing annual return for the current financial year

Documents on which Input Tax Credit may be applied for

  • Tax invoice issued by licenced suppliers
  • Note of debit given in respect of the earlier tax invoice issued by the registered supplier
  • Invoice given by the recipient of products or services who has paid tax under the reverse charge mechanism
  • A bill of entry or equivalent paper in the case of import.
  • Receipt or credit note issued by the Input Service Distributor.

How to avail Input Tax Credit under Reverse Charge Mechanism (RCM)?

Instances where tax has been paid under reverse charge basis, ITC may be availed in the same month in which the payment is made, under the following conditions –

  • Liability was settled by cash
  • Goods or services have been used for commercial purposes.
  • Self-invoicing shall be effected on such transactions as no tax invoice can be given by an unregistered seller.

Input Tax Credit FAQs

1. Can I claim Input Tax Credit on an invoice that is more than a year old?

No, you must have claimed it before the annual filing of the current financial year or before the due date for GST return filing for the month of September of the next financial year. Hence, you cannot claim ITC on an invoice that is more than a year old. However, in case of capital goods, ITC can be claimed up to 5 years from the date of invoice.

2. Can I claim Input Tax Credit on both goods & services?

Yes, since GST is applicable on both goods & services, ITC is also applicable on both goods & services.

3. Can I claim Input Tax Credit on an invoice where I have received only part of the shipment?

For invoices where you have received only part of the shipment, ITC may be claimed only upon receipt of last lot or instalment.

4. Who all are eligible to claim the Input Tax Credit?

Input Tax Credit can be claimed by a manufacturer, supplier, agent, e-commerce operator, aggregator or any of the persons mentioned, who are registered under GST, are eligible to claim input credit for tax paid by them on their purchases.

5. What are the documents required to claim Input Tax Credit?

One of the following documents is required to claim Input Tax Credit:

  • Invoice issued by a supplier of goods or services or both
  • Invoice issued by recipient alongwith proof of payment of tax
  • A debit note issued by supplier
  • Bill of entry or similar document prescribed under Input Tax Credit Mechanism in GST Customs Act
  • Revised invoice
  • Document issued by Input Service Distributor

6. Can I raise an Input Tax Credit request in Tamil Nadu against the SGST I paid in Maharashtra?

No, SGST paid in one state cannot be utilized to claim Input Tax Credit in another state.

7. I have received the goods and the payment will be made within a month. Can I claim ITC now?

No, you can claim ITC only once the payment is made and the seller has remitted the relevant GST for his account.

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