1. What is Input tax credit
The input tax credit mechanism allows GST registered businesses to receive refunds/credit of GST paid for the purchase of such inputs (goods or services) to prevent the cascading taxation effect. Input tax credit claims can be made by the GST registered business/individuals only on tax paid for the purchase of any business relevant inputs. The following is an example of how input tax credit works:
Suppose the GST payable on supply of the final output of a manufacturer is Rs. 100 and the GST paid on input is Rs. 60. In such a case, the manufacturer can claim ITC of Rs. 60 and net tax payable at the time of supply would be Rs. 40 only (Rs. 100 – Rs. 60). This way, the cascading effect of taxation is prevented.
2. Set off of different components of GST
As per rule 88A in the CGST Rules input tax credit of Integrated tax may be utilized for payment of Central tax and State tax/Union territory tax, in any order subject to the condition that the entire input tax credit on account of Integrated tax is completely exhausted first before utilization of the input tax credit of Central tax or State / Union territory tax. The order of utilization of input tax credit will be as per the order (of numerals) given below:
|Input tax credit on account of
|Output liability on account of Integrated tax
|Output liability on account of Central tax
|Output liability on account of State tax
||II- In any order or in any proportion
|III- Input tax credit of Integrated tax to be completely exhausted mandatorily before utilising any other credit
|State tax/Union Territory tax
Some important points to be kept in mind
- IGST ITC has to be first utilized for payment of IGST liability and the remaining balance of IGST ITC can be used towards payment of CGST/SGST liability in any order or proportion. Further IGST ITC to be utilized fully before utilization of any other credit.
- Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST / UTGST cannot be utilised for payment of CGST.
3. When Input Tax Credit is not allowed
Input tax credit is not allowed in following cases
- Goods and services not intended to be used “in the course of business” or “for furtherance of business”
- when final supply is exempt
- goods and/or services on which tax has been paid under composition scheme
- If depreciation has been claimed on the tax component of a capital goods
- Goods/ Services used for Personal Consumption
- Any tax paid due to Non-payment of tax, Short payment of tax or Excessive Refund
- ITC utilised or availed by way of Fraud, Will-full mis-statements or Suppression of Facts
Further input tax credit is not allowed on following items:
- Food & Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic & Plastic Surgery except when the goods and/or services are availed to deliver the same category of services or as a part of composite supply
- Membership of Club or Fitness Centre or Health Centre
- Credit on Motor Vehicles/Vessels and aircraft and expenses related to them (i.e. insurance, servicing and repair and maintenance) except when they are supplied in the “normal course of business” or are used for providing “Transportation of goods or Passengers”, or “Imparting Training on Motor Driving Skills”
- Rent-a-Cab service, Health Insurance and Life Insurance except when the Govt. makes it obligatory for the employers to provide it to their employees, or where the goods and/or services are taken to deliver the same category of services or as a part of composite supply
- Travel Benefits to Employees. Eg: Leave Travel Allowance
- Works Contract Services, when supplied for the Construction of Immovable Property except when a) Works Contract Services supplied for Construction of Plant & Machinery or b) One Works Contract Service is input for another works contract service c) When the value of works contract services is not capitalized, ITC is allowed to all the recipients irrespective of their line of business.
- Goods and/or Services for Construction of Immovable Property, whether to be used for Personal or Business use
- Goods/ Services received by a Non-Resident Taxable person except for Goods imported by a Non-Resident taxable person
- Goods which are lost/ stolen/ destroyed/ written off/ disposed of by gift/ free sample
4. Conditions for Claiming Input Tax Credit under GST
Only a Registered Person can claim the benefit of Input Tax Credit of GST subject to fulfilment of the following conditions:-
- He is in possession of Tax Invoice or any other specified tax paid document
- He has received the goods or services. “Bill to ship” scenarios also included
- Tax charged in respect of such supply has been actually paid by the supplier
- He has furnished the prescribed GST returns
- Where the goods against an invoice are received in lots or instalments, the registered taxable person shall be entitled to take credit upon receipt of the last lot or instalment.
- Input tax credit is allowed only on purchases made for selling taxable or zero rated goods or services. ITC is not allowed for purchases made for exempted supplies or for Non business purpose.
- The payment should be made within 180 days from the date of issue of invoice. If payment is not made within 180 days, the amount of credit availed by the recipient is required to be added to his output tax liability along with prescribed interest. However, once the amount is paid to supplier, the recipient would be entitled to avail the credit again. In case of part payment, proportionate credit would be allowed. This condition of payment of value of supply plus tax within 180 days does not apply in the following situations :Supplies on which tax is payable under reverse charge
- Deemed supplies without consideration
- Addition made to the value of supplies on account of supplier’s liability, in relation to such supplies being incurred by the recipient of the supply (i.e. expense incurred on behalf of recipient of the supply)
5. Time limit to avail Input credit
ITC is not allowed after any of the following:
- due date of return for month of September of next financial year
- annual return filed for relevant year (Filing date, not due date)
e limit does not apply to claim for re availing of credit that had been reversed due to non-payment of amount to supplier within 180 days.
6. Documents on the basis of which the ITC can be claimed
- Invoice issued by supplier of goods or services or both
- Invoice issued by Recipient along with proof of payment of Tax
- A Debit note issued by the supplier
- Bill of entry or similar document prescribed under the Customs Act
- Revised Invoice
- Document issued by the Input Service Distributer
7. ITC on capital goods and its reversal on sale
Credit of tax paid on capital goods is also permitted to be availed in one instalment. However, Input tax credit of tax component of capital goods is not allowed if the person has claimed depreciation in income tax act for GST component on capital goods. In other words, a person can either take input tax credit of GST on capital goods or claim depreciation on tax component.
Further If the taxable person sells such capital goods on which ITC had been taken then such person is liable to pay GST of higher of following:
- ITC taken on such capital goods less 5 percentage points per quarter of a year or part thereof from the date of invoice
- Sale price of capital goods multiplied by GST rate
Where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined.
8. Input Tax Credit in case of Imports
As per GST provisions, all supplies of goods & services made as imports into India are treated as an inter-state supply, consequently it attracts IGST. Further, location of the importer is considered as ‘place of supply’ of goods imported into India. In case of import of service, place of supply of service shall be location of ‘receiver of service’, if the same is not available then it will be location of ‘supplier of service’.
The input tax credit of IGST and GST Compensation Cess is available to the importer. However, the input tax credit of Basic Customs Duty (BCD) is not available.
In order to avail ITC of IGST and GST Compensation Cess, an importer has to mandatorily declare GST Registration number (GSTIN) in the Bill of Entry.
The Customs EDI system is inter-connected with the GST portal for the validation of ITC. Bill of entry in the non-EDI locations is digitized and used for validation of input tax credit provided by the GST portal.
9. Special circumstances under which ITC is available
- A person who has applied for GST Registration within 30 days of becoming liable for Registration is entitled to claim ITC in respect of goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax
- A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date of registration
- A person switching over to the normal scheme from the composition scheme under the section10 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as a normal taxpayer
- Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply subject to reductions for the earlier usage as prescribed in the rules
- ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier
- In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilised ITC shall be allowed to be transferred to the transferee
10. Other Relevant Points regarding GST Input Tax Credit
- If the tax paid on inputs is more than the tax paid on output, the ITC can either be carried forward or claimed as refund in accordance with provision of law.
- The balance tax after claiming the input tax credit is need to be deposited with the appropriate authority by the 20th of the next month in prescribed manner.
- The GST paid under the Reverse Charge Mechanism can also be claimed as Input Tax Credit
- A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid.