Input Tax Credit (ITC) under GST

If you’re a finance leader, you know that every rupee matters so it becomes essential to manage tax liabilities and spearhead initiatives for cash flow efficiency. On that note, Input Tax Credit (ITC) claims isn’t just a tax compliance checkbox but a powerful tool for your entity to streamline its tax expenses and boost the cash flow. However, tapping into the full potential of ITC implies your team and you knowing the rules, navigating exceptions, and handling those complex reversals under the GST law. 

Here’s a breakdown of all you need to know to maximise ITC for your business-

• What is input tax credit (ITC) with example?
• Who can claim ITC? (Conditions to claim an input tax credit under GST)
• What can be claimed as ITC? (Items on which input tax credit (ITC) is not allowed)
• Eligible and ineligible input tax credit
• Documents Required for Claiming ITC
• Special cases of ITC claims
• Time limit to claim input tax credit under GST
• How to claim ITC?
• ITC reversal explained
• ITC reconciliation decoded
• How to automate and maximise ITC claims?
• FAQs on input tax credit

Latest Updates
8th October 2024

Section 128A of the CGST Act waived off interest and penalties for certain non-fraudulent ITC claims from prior years (2017-2020). This waiver is effective through Notification No. 21/2024 issued on 8th October 2024. It applies under strict conditions but excludes erroneous refunds so as to streamline the ITC claim process while promoting compliant reporting.
 

What is input tax credit with example?

Input Tax Credit (ITC) refers to the tax paid on purchases for the business which can be claimed as deduction at the time of paying tax on output tax.

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: 

1. Tax payable on output (final product) is Rs 450
2. Tax paid on input (purchases) is Rs 300
3. You can claim input credit of Rs 300 and deposit the rest Rs 150 as taxes in cash

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils all the conditions as prescribed.

Conditions to claim an input tax credit under GST-

1. The dealer should be in possession of tax invoice
2. The said goods/services have been received
3. GSTR-3B have been filed by the recipient
4. The tax charged has been paid to the government by the supplier
5. The recipient must have paid towards the invoice or debit note within 180 days from the invoice date
6. When goods are received in installments ITC can be claimed only when the last lot is received
7. ITC can be claimed only for taxable supplies of goods or services and the purchases made must be used in the furtherance of such business
8. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

1. ITC on the document, such as invoice or debit note, must be claimed within the time limit defined which is earlier of two dates-
   1. 30th November of the year following the financial year in which the document is issued
   2. date of filing the annual returns

1. CGST Rule 36(4) specifies that ITC claims made in GSTR-3B must match with the details appearing in GSTR-2B
2. Must not be making supplies under the composition scheme

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: 

1. Personal use
2. Exempt supplies
3. Supplies for which ITC is specifically not available under the CGST Section 17(5)

Eligible and ineligible input tax credit

There is an exclusion list under Section 17(5) of the CGST Act which keeps some transactions and businesses out of the scope of ITC claims. ITC cannot be claimed on such items. Apart from the list, all others are eligible for ITC claims.

Some cases of ineligible input tax credit are listed below-

• Motor Vehicles: Used for personal purpose (exceptions for resale or commercial use or mandated cab services)
• Food and Beverages: Catering, health, and similar services unless legally required
• Membership Fees: Club or gym memberships
• Insurance: Health and life insurance, except for government mandates
• Construction Expenses: Building immovable property
• Lost or Destroyed Goods: Damaged or gifted items

Documents Required for Claiming ITC

The following documents are required for claiming ITC: 

• Invoice issued by the supplier of goods/services 
• The debit note issued by the supplier to the recipient (if any) 
• Bill of entry 
• 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 the GST law
• An invoice or credit note issued by the Input Service Distributor(ISD) as per the invoice rules under GST
• A bill of supply issued by the supplier of goods and services or both

Special Cases of ITC

The GST law specifes ITC claim rules in certain scenarios such as involving capital goods, job work, ISD, banks and business transferred.

ITC for Capital Goods & More

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.

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:

1. From principal’s place of business
2. Directly from the place of supply of the supplier of such goods

However, to enjoy ITC, the goods sent must be received back by the principal within 1 year (3 years for capital goods).

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.

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.

ITC for Banks and Financial institutions

Banks and financial institutions can claim ITC on taxable supplies, but they must follow a unique calculation method. The law allows a 50% ITC claim on inputs, capital goods, and input services for banks and financial institutions. This special provision is to address the mixed nature of taxable and exempt supplies popular among banks as they also handle exempt financial services.

Time limit to claim input tax credit under GST

Input tax credit can be availed in GSTR-3B on or before the expiry of the timelimit defined by the GST law. The time limit to claim ITC on invoice or debit note issued in a financial year is earlier of the below two dates-

• 30th November of the year following such financial year, or
• The date of filing the annual returns for that financial year.

Note: Eventhough 30th November of next year is the deadline. Since ITC is reported in GSTR-3B, we consider the due date of GSTR-3B as the deadline without late fee. The due date of GSTR-3B for October of year following the financial year is due by the 20th of following month. If anyone missed filing GSTR-3B of October by the due date of 20th November, they can still claim pending ITC for a FY in that return filed on or before 30th November with late fees.

For example, an invoice was issued on 30th December 2023 to ABC Company. They have not yet filed the annual returns for FY 2023-24 yet. The company can claim ITC given on this invoice before 30th November 2024. However, they can claim such ITC in the GSTR-3B of October 2024 due on 20th November 2024.

How to claim ITC?

ITC can be claimed after a thorough reconciliation of entries in Invoice Management System and GSTR-2B is done with purchase register. All regular taxpayers must report the amount of input tax credit (ITC) in their monthly GST returns of Form GSTR-3B in Table 4. The table 4 requires the summary figure of eligible ITC, ineligible ITC, ITC reversed and reclaimed during the tax period. 

The format of Table-4 of the GSTR-3B has changed since July 2022. Currently, Table 4(A)(5) auto-populates the total ITC figure from the GSTR-2B, including ineligible/unavailable ITC. If the total ITC is not properly bifurcated and reversed in Table 4(B), the same will wrongfully accumulate as a part of the net ITC claims of the taxpayer. Hence, such an ineligible/unavailable ITC figure should be identified and rightfully reversed. If reclaimed from earlier tax periods in the current period, it should be reported as well in order to arrive at the exact net eligible ITC figure.

Declaring the correct ITC values in Table-4 is crucial as it contributes to the government's computation of net tax liability and GST dues. Failure to report accurate values in this table could result in discrepancies with the GSTR-2B, ultimately leading to notices and penalties!

The government is taking initiatives to correlate the data reported in GSTR-3B with GSTR-2B instantly upon filing and, in turn, with the GSTR-9 as part of the GST departmental audit. Introduction of real-time scrutiny of returns and automated intimations in DRC-01C are examples of such initiatives.

The latest format of the Table 4 is given below: 

A taxpayer could have claimed any amount of provisional ITC until 9 October 2019. Later on, the government restricted the provisional ITC as below:

Accordingly, a taxpayer can claim ITC only if the same appears appears in their GSTR-2B. Hence, no provisional ITC can be claimed from 1st January 2022 onwards. Hence, matching of the purchase register with the GSTR-2B is crucial for ITC claims.

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. Read our article to understand more about the segregation of ITC into business and personal use and subsequent calculations.

ITC Reconciliation decoded

ITC reconciliation is essential since it helps businesses to make sure that they are claiming the correct input tax credits (ITC), thereby reducing the risk of legal issues, such as penalties or the cancellation of their GST registration. Download GSTR-2B data from the government portal and match the details prepared in draft GSTR-3B. Identify differences and correct the same.

ITC claimed by the person in GSTR-3B has to match with the details specified by his supplier in his GSTR-1 and appearing in the Invoice Management System (IMS), thereafter if accepted, will flow into the GSTR-2B. Once the supplier saves a document, it will flow from GSTR-1/IFF/1A to the IMS of the recipient. Thereafter, when the supplier files the respective GSTR-1/IFF/1A, the document gets populated into GSTR-2B of the recipient. If no action is taken, the invoice is automatically accepted and added to GSTR-2B. Running GSTR-2B vs purchase register reconciliation for ITC actions is henceforth critical. Not using IMS exposes enterprises to a higher risk of notices from tax authorities due to potential over-claimed ITC.

In case of any mismatch between GSTR-3B, purchase register and GSTR-2B, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR-3B. 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.

Using an automated, AI-based GST reconciliation engine, such as in Clear GST Max, will help identify discrepancies here with 100% accuracy as against undertaking this exercise manually. 

How to automate and maximise ITC claims?

Automation of ITC matching and Table-4 reporting is critical. Any manual intervention always carries risks of clerical errors and omissions leading to differences between GSTR-2B and GSTR-3B. Tracking ITC reversals and reclaims are equally challenging. Introduction of IMS has added additional layer in the ITC reconciliation.

Businesses can tackle all repetitive and challenging actions smartly using a tech-based compliance solution. Tech-based solutions will mitigate the risk of non-compliance and notices. They provide a 100% reliable audit trail to avoid future discrepancies.

Automate your enterprise's Input Tax Credit (ITC) claim journey with Clear!

• Instead of comparing GSTR-2B against purchase register (PR), Clear lets you reconcile IMS+2B against PR, providing a holistic view across sources.
• Take ITC actions directly in Clear, which will automatically flow into IMS on the government portal.
• GSTR-2B will be regenerated and downloaded, inheriting the actions taken on IMS.
• Enjoy multi-GSTIN & multi-PAN ingestion of data.
• Get access to AI-powered recon engine & PAN-level matching capabilities do GSTR-2B vs purchase register seamlessly.
• The auto-population of Table 4 based on the GSTR-2B vs PR reconciliation is as per the latest GST return changes. 
• Every invoice flows into the right sub-section to ensure accuracy, based on the ITC claim action taken on matching status.
• Get a calculation trail of all ITC claimed at a section and document level.
• Easy documentation of Table 4 breakup into subsections such as deferred ITC, ITC for the current month, ITC for the previous month, etc.
• Download an Excel file summarising calculations, with sub-sections and amounts clearly marked.
  
  Our robust solution such as Clear GST Max and platform such as Clear Finance Cloud for Compliance, supercharged by GL-Stream helps you claim maximum ITC while staying compliant. Take a demo to learn more about the capabilities.