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.
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.
When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect 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 utilisation 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.
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.
ITC can be claimed only purchases 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
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. We have a detailed article explaining the reason for mismatch of ITC and procedure to be followed to apply for re-claim of 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 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.
All these documents are to furnished at the time of filing form GSTR-2.
Special cases of ITC
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.
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 in both the cases when goods are sent to job worker:
- From principal’s place of business
- 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).
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 among all the recipients (branches) under different heads like CGST,SGST/UTGST, IGST or cess.
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.