Know Input Tax Credit (ITC) & process to claim it – Goods and Services Tax (GST) is the universal taxation system introduced in India with lot of protest. It is well known that the filling GST is not an easy task and it requires certain level of understanding and claiming Input Tax Credit or ITC is one of them. The conditions to claim Input Tax Credit under GST is a very critical activity for every business to settle the tax liability.
According to the GST framework, large companies cannot claim credits unless their suppliers and vendors have paid the tax. Section 16 of the GST law says that if a vendor does not pay GST to the government, input tax credit will be denied to the buyer.
In this article, we’ll define the Input Tax Credit (ITC) under GST with example. This will be very useful for bankers while financing the loan or overdraft or working capital to businesses. It will help them in verifying the accurate and actual turnover of the firm.
What is Input Tax Credit (ITC)?
In generic terminology, Input Tax Credit can be defined as the difference between the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.
Input Tax Credit can’t be applied to all type of inputs, each state may have different rules and regulations. Input Tax Credit is also applicable to a dealer who has purchased good to resale.
How to calculate Input Tax Credit?
Check out the below example for the better understanding. Here, M/S AskBanking has charged Rs 90,000 as GST from the client but pays only Rs 77,400. The firm has claimed the Input Tax Credit of amount Rs 12,600, which was its cost to run the business.
|Services provided by M/S Askbanking to clients||Rs 5,00,000||Rs 90,000|
|(Less) Rent Paid for Office||Rs 50,000||Rs 9,000||Utilization for ITC|
|(Less) Internet Charges Paid||Rs 20,000||Rs 3600||Utilization for ITC|
|Total||Rs 5,70,000||Rs 77,400||GST to be remitted to the Government|
What is the time limit to avail Input Tax Credit (ITC)?
ITC must be claimed earlier of the following-
a) Furnishing of annual return or
b) Due date of filing the monthly return (GSTR-3) for the next financial year’s September month.
Example– For the invoice dated 10/12/2017, ITC must be availed earlier of the following dates –
Annual return filed – 10th December 2018
The due date for Monthly Return of Sept 2018 – 20th October 2018, ITC must be availed by this date.
How to claim Input Tax Credit (ITC)?
The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:
- One must be a registered taxable person.
- ITC can be claimed only in case of business purposes.
- Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
- For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
- Input Tax Credit may be transferred to Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
- Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
- Input Tax Credit can be claimed only against the actual receipt of goods and services
- The Input Tax should be paid through Electronic Credit/Cash ledger.
- All GST returns such as GST-1, 2,3, 6, and 7 needs to be filed
How to utilize the Input tax credit?
In GST we have three types of taxes CGST, IGST, and SGST/UTGST. For the inter-state supply of goods/ services, IGST is charged and for the intra-state supply of goods/services CGST and SGST/UTGST are charged.
While making payment for the above taxes, input tax credit will be allowed in the following manner-
Credit 1st to be utilized for payment of Balance if any
CGST CGST IGST
IGST IGST CGST and then SGST/UTGST
SGST/UTGST SGST/UTGST IGST
Input Tax Credit (ITC) Can’t be Claimed if
Items Exceptions :
- Credit on Motor vehicles and other conveyances purchased or Expenses related to the normal use of motor vehicles for office purposes cannot be claimed as an input tax credit. Taxable person is in the business of sale and purchase of new or second-hand motor vehicle i.e Dealer of the motor vehicle or
- Providing the service of transportation of passengers(Ola, Uber)/ goods(GTA) or The motor vehicle is used by the driving school.
- Supply of food and beverages, outdoor catering, beauty treatment, health service and cosmetic and plastic surgery
- An inward supply of aforesaid goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply then the input tax credit will be available.Example- When the outdoor catering service is subcontracted then the main contractor can avail input on tax charged by sub-contractor because the service received is used for making the outward supply of the same category.
- Rent-a-cab, Life and health insurance
- The Government notifies the services which are obligatory for an employer to provide to its employees
under any law for the time being in force or The receiver of service provides the same line or category of service example- Government made a law for the companies to provide cab facility for there female employees.
- Travel benefit to employees as leave or home travel concession. Example – Tour arranged for the employee
- Works contract service for construction of immovable property. Works contractor uses the service of another contractor, then the former can claim the ITC.
- Construction of immovable property which includes reconstruction, renovation, additions or repairs. Goods/services used for construction on his own account or even when it is used for the furtherance of business. Example- Mr.A constructing his own office, ITC on goods or services used for the construction of the office cannot be claimed by Mr.A
- ITC will not be available for the goods/services received by the non-resident taxable person.
- In case if Non-resident taxable person imports goods or service, then ITC will be allowed.
- Goods/services received for personal consumption
- Goods stolen /destroyed/ written off/distributed as a gift or free samples
- Dealer under composition scheme- Neither the dealer nor the receiver of goods from the dealer can claim ITC
- Membership in a club, Health, and Fitness centre. Example- Company paying the gym fees for its employees
What are the documents and forms required to claim Input Tax Credit?
Each applicant will require the following documents to claim Input Tax Credit under GST:
- Supplier issued invoice for supplying the services and goods or both according to GST law.
- A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
Bill of entry.
- A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules.
- An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law.
- A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.
- The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request.
- For taxes paid on goods and services or both due to any fraud or due to order for the demand raised, suppression of facts or wilful misstatement, Input Tax Credit cannot be claimed.
- Since input credit will be available to the seller at each stage, the input tax credit is expected to bring down the overall taxes charged on the product at present. So, if input credit mechanism works efficiently, final consumers may see the cost reduction.