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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:

input tax credit

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:

  • Tax payable on output (FINAL PRODUCT) is Rs 450
  • Tax paid on input (PURCHASES) is Rs 300
  • You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes.

input tax credit

Who can claim ITC?

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

  • The dealer should be in possession of tax invoice
  • The said goods/services have been received
  • Returns have been filed.
  • The tax charged has been paid to the government by the supplier.
  • When goods are received in installments ITC can be claimed only when the last lot is received.
  • 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.

What can be claimed as ITC?

ITC can be claimed only for business purposes.

ITC will not be available on goods or services exclusively used for:

  • Personal use
  • Exempt supplies
  • Supplies for which ITC is specifically not available

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-2. To find out more about the segregation of ITC into business and personal use and subsequent calculations, please visit our article.

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 3.  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.

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.

All these documents are to furnished at the time of filing form GSTR-2.

Special cases of ITC

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.

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.

Please our many articles discussing ITC under GST in detail.

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All Articles

  1. All Purchases are automatically reflected in your GSTR-2A and therefore a reversal of input tax credit has to be done while filing your GSTR-2.
  2. Let us look at chapter 5 of CGST rules - Input Tax Credit. This text is taken from http://www.cbec.gov.in/resources//htdocs-cbec/gst/cgst-rules-01july2017%20.pdf
  3. What happens to the CENVAT Credit when a dealer who was not registered under Excise Act receives goods cleared before 1st July 2017? Learn more...
  4. With matching, reversal and reclaim of ITC it's evident that claiming ITC will be a challenging task with feature of auto-population of inward supply detail
  5. ITC Rules for Common Credit under GST i.e. Exempt and Taxable Supply, Business and Non-Business Activity are aligned with the existing CENVAT Rules 2004
  6. we shall give you our guide on ITC Rules for Capital Goods under GST as per formula, reversal and ITC for goods send on job work under GST
  7. ITC rules for Input Service Distributor along with Conditions and manner for distribution have been prescribed under GST for distribution to recipients
  8. The distribution of ITC by Input Service Distributor has very specific rules under GST. Know more about the process and conditions for ITC distribution.
  9. There are certain cases when ITC under GST cannot be availed. like the supply of life and health insurance. These cases are mentioned in the CGST Act.
  10. Treatment of ITC on Transfer of Business is different than the regular ITC. Form GST ITC-02 has to be submitted in case of amalgamation.
  11. Know all about the forms and documents required for filing for ITC under GST
  12. Situations where input tax credit can not be availed
  13. Fulfillment of Input Tax Credit under GST - Conditions To Claim is one of the most critical activity for every business to settle its tax liability.
  14. Input Service Distributor under GST and related laws have been kept aligned to continue the existing position and continue all the benefits available
  15. Input credit on job work can be claimed if goods are returned in 6 months. Under GST, there is sufficient limit for goods to be returned from job work.
  16. Who is a 'Taxable Person' under GST? Learn all About the Types of Taxable Persons and Provisions for Each Under the GST Law.
  17. Understanding the mechanism around input credit in GST.