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Input Tax Credit – ITC

Updated on :  

08 min read

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.

ITC-input tax credit

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17th December 2022
The following are recommendations from the 48th GST Council meeting-
(1) CGST Rule 37(1) is going to be amended retrospectively from 1st October 2022 for reversing ITC as per the second proviso to Section 16 of CGST Act, only to the extent of the invoice value not paid to the supplier versus the value of the supply, along with tax payable.
(2) GST Council will insert Rule 37A in CGST Rules that will define steps to reverse ITC claimed on taxes not deposited by the supplier within a specified date. Further, the process of re-availing such ITC where the supplier pays it subsequently will be provided in compliance with Section 16(2)(c) of the CGST Act.
(3) Procedure will be given to verify ITC differences between GSTR-3B and GSTR-2A for FY 2017-18 and 2018-19. It would reduce the need for litigations and give much-needed clarity to taxpayers and officers.
(4) ITC will be available for the scenario stated in Section 12(8) of the IGST Act – the place of supply is a foreign country, but the GST-registered recipient is in India, in cases of goods transportation/courier/mail services.

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: a. Tax payable on output (FINAL PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c. 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 fulfils ALL the conditions as prescribed.

a. The dealer should be in possession of tax invoice

b. The said goods/services have been received

c. Returns have been filed.

d. The tax charged has been paid to the government by the supplier.

e. When goods are received in installments ITC can be claimed only when the last lot is received.

f. 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 for goods or services exclusively used for: a. Personal use b. Exempt supplies c. Supplies for which ITC is specifically not available

How to claim ITC?

input tax credit

All regular taxpayers must report the amount of input tax credit(ITC) in their monthly GST returns of Form GSTR-3B. The table 4 requires the summary figure of eligible ITC, Ineligible ITC and ITC reversed during the tax period. The format of the Table 4 is given below: A taxpayer can claim ITC on a provisional basis in the GSTR-3B to an extent of 20% of the eligible ITC reported by suppliers in the auto-generated GSTR-2A return. Hence, a taxpayer should cross-check the GSTR-2A figure before proceeding to file GSTR-3B. A taxpayer could have claimed any amount of provisional ITC until 9 October 2019. But, the CBIC has notified that from 9 October 2019, a taxpayer can only claim not more than 20% of the eligible ITC available in the GSTR-2A as provisional ITC. This means taht the amount of ITC reported in the GSTR-3B from 9 October 2019 will be the total of the actual ITC in GSTR-2A and the provisional ITC being 20% of the actual eligible ITC in the GSTR-2A. Hence, matching of the purchase register or expense ledger with the GSTR-2A becomes crucial.

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. 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-3B. Learn how to go about reconciliation through our article on GSTR-2A Reconciliation. 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.

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 visit our other articles discussing ITC under GST in detail.

All Articles

  1. Section 17(5) of CGST Act contains list of ineligible ITC or input tax credit against which recipients or buyers cannot claim tax credits in GSTR-3B
  2. GST on employee perks has been clarified in Circular 172/2022. Read on to know ITC availability and advance rulings passed.
  3. Due to the inconsistency of Section 16(2)(c) and Rule 36(4), a buyer will find it difficult to claim the ITC. Know more about it in this article.
  4. Vendor reconciliation refers to the reconciliation of a vendor’s account with the statement provided by the vendor. Know more about it.
  5. All about the revised Section 38 to the Central Goods and Services Tax (CGST) Act governing input tax credit claims and its impact on businesses.
  6. Section 16(2)(aa) has been notified from 1st January 2022. The taxpayer must claim ITC only as per GSTR-2B, without an additional 5% earlier allowed.
  7. This article discusses whether non-compliance of suppliers lead to ITC reversal by recipients. It also covers the latest court verdicts.
  8. CGST Rule 86A was introduced by the government to block the use of fraudulently availed ITC. This article gives you a detailed insight into Rule 86A.
  9. Claiming accurate ITC under GST helps minimise your business' output tax liability. This article highlights the important ways to maximise your ITC claims.
  10. Rule 86B : Learn all about the new rule 86B intended to restrict the use of ITC available in the electronic credit ledger for discharging the output tax liability.
  11. ITC-02 is a form used for transferring the Input Tax Credit (ITC) in case of Mergers and Acquisitions. Read to know the steps to file ITC-02 on GST Portal
  12. ITC-02A is a form that went LIVE on GST Portal in May 2020. Businesses can transfer ITC from one GSTIN to another, within 30 days of obtaining the new GSTIN
  13. Know all the procedure to be followed for the cancellation of GST registration in case of death of sole proprietor including transfer of unutilized ITC.
  14. The Input Tax Credit (ITC) is to be reversed under various scenarios. The rules have been notified under the Act and know how to calculate ITC reversal.
  15. CBIC notified revised rule on GSTR-3B - Provisional ITC is removed from 1st Jan 22. Until 31st Dec, you could claim 5% extra of eligible ITC in GSTR-2B.
  16. Know all the steps to be taken to reconcile input tax credit between auto-generated GSTR-2B / GSTR-2A and GSTR-3B, as well as matching ITC with books of accounts, this can be done by way of reconciliation.
  17. A new section has been introduced in the CGST Act, which lays down the guidelines for claiming input tax credit under the new return filing system.
  18. The monthly tax and ITC summary report is useful to compare and reconcile the GST returns filed during the year with the annual return.
  19. New CGST law for Input tax credit utilisation will apply from 1st Feb 2019. The order in which we can utilise ITC has been changed. Read to know more.
  20. GST ITC 01 form is required to be filed to claim the input tax credit by newly registered businesses under GST. Check out steps to file Form ITC 01
  21. Read here to know about the procedure of claiming input tax credit under present and proposed simplified GST return filing system.
  22. Inverted duty structure or Inverted rate structure is a case where GST rates on Inputs materials is more than outward supplies. Know what are the implications and issues.
  23. 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.
  24. 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
  25. 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...
  26. 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
  27. 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
  28. 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
  29. ITC rules for Input Service Distributor along with Conditions and manner for distribution have been prescribed under GST for distribution to recipients
  30. 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.
  31. 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.
  32. Know all about the forms and documents required for filing for ITC under GST
  33. 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.
  34. Input Service Distributor under GST and related laws have been kept aligned to continue the existing position and continue all the benefits available
  35. 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.
  36. Who is a 'Taxable Person' under GST? Learn all About the Types of Taxable Persons and Provisions for Each Under the GST Law.
  37. Understanding the mechanism around input credit in GST.