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Input Tax Credit under GST – Conditions To Claim

Updated on :  

08 min read.

‘Input Tax Credit’ or ‘ITC’ means the Goods and Services Tax (GST) paid by a taxable person on any purchase of goods and/or services that are used or will be used for business. 

ITC value can be reduced from the GST payable on the sales by the taxable person only after fulfilling some conditions. These conditions given under the GST law are more or less in line with the pre-GST regime, except for a few additional ones such as GSTR-2B. These rules are direct and maybe stringent in nature.

Latest Updates on ITC

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.

Check out the latest condition added to GST provisions to fulfil and claim ITC, by watching the video-

Conditions to claim an input tax credit under GST

Section 16 of the CGST Act lays down the conditions to be fulfilled by GST registered buyers to claim ITC. The conditions are summarised as follows-

  1. Such input tax credit is eligible for claims if the goods or services purchased are further used for business purposes and not personal use.
  2. Buyer must hold such tax invoice or debit note or document evidencing payment towards the purchase. For example, Mr Manoj wants to claim an ITC of Rs.5,600 as he found the ITC entry in GSTR-2B of January 2022 as of 10th February 2022 but he has not received the invoice till 20th February 2022, being the date of filing the returns. He cannot claim Rs.5,600 as ITC while filing GSTR-3B of January 2022 due to the absence of the invoice.
  3. Such tax invoice or debit note is filed by the supplier in Form GSTR-1 and it appears in the buyer’s Form GSTR-2B. For example, Mr Manoj received a tax invoice dated 13th January 2022 for purchases and wants to claim an ITC of Rs.5,600 but has not found the ITC entry in GSTR-2B of January 2022 as of 20th February 2022. He cannot claim Rs.5,600 as ITC while filing GSTR-3B of January 2022.
  4. From 1st January 2022, the benefit of provisional ITC claims is no longer available as per Section 16(2)(aa). It means the amount of ITC reported in GSTR-3B will be a total of actual ITC in GSTR-2B. The provisional ITC of 5% of actual ITC in GSTR-2B will no longer be allowed. Hence, a regular matching of the purchase register or expense ledger with GSTR-2B is crucial. Until 31st December 2021, a regular taxpayer could have claimed provisional ITC in GSTR-3B to the extent of 5% of the ITC available in GSTR-2B, in addition to ITC in GSTR-2B. 
  5. The buyer has received the goods and/or services. The goods are said to be received if it is delivered by the supplier to the buyer or his representative or agent or another person as directed, against a document of transfer of title of goods. On the other hand, the services are said to be received if it is rendered by the supplier to the buyer or another person as directed. For instance, Mr Manoj received a tax invoice for purchases dated 10th January 2022 but has not yet received goods until 20th February 2022. The taxpayer cannot report ITC on that tax invoice in GSTR-3B for January 2022 and may claim it in future once goods are delivered.
  6. The buyer must furnish the GST returns in Form GSTR-3B. 
  7. Where the goods are received in lots or instalments, ITC will be allowed to be availed when the last lot or instalment is received.
  8. The buyer must pay towards the supply of goods and/or services within 180 days from the invoice date. If they fail to, then the ITC already claimed will be added back to output tax liability and interest must be paid on such tax. ITC claim will be reinstated once the payment is made to the supplier.
  9. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good purchased. 
  10. ITC on a tax invoice or debit note belonging to a financial year must be claimed within the time limit given by the GST provisions, explained in the next section.
  11. Common credit of ITC must be identified and split as it is used together for selling both exempt and taxable supplies, and/or business and non-business activity.
  12. There are certain items listed down that are not eligible for ITC claims under Section 17(5) of the CGST Act, known as blocked credits under Section 17(5) of the CGST Act.

Time limit to claim an input tax credit under GST

The time limit to claim ITC against an invoice or debit note is earlier of two dates, given below: 

  • The due date for filing GST returns for September of the next financial year.
  • The date of filing the annual returns in form GSTR-9 relating to that financial year. 

For instance,  XY Corp, a buyer with a purchase invoice dated 8th December 2021 (FY 2021-22), wants to claim GST paid on that purchase. As per the criteria laid down to find out the time limit, the two dates are as follows: 

  • The due date of filing GST return for September 2022 (belonging to FY
    2022-23) is 20th October 2022**.
  • The date of filing GST annual return for FY 2021-22 is 31st December 2022. 

The earlier of the two is the date up till when the XY Corp can claim ITC of FY 2021-22. Therefore, the last date is 20th October 2022 and XY Corp can claim this ITC in any of the tax periods between April 2021 to September 2022. 

Note: For debit notes, the above condition must be considered with respect to the debit note itself and not the original invoice that it is linked to.

**The last date is changed to 30th November of the year following the financial year, vide Budget 2022, but yet to be notified by the CBIC. Until then, the due date of September return shall be the last date.

Items on which ITC is not allowed

The input tax credit is not available for claims in the following cases-

  1. Motor vehicles, with a seating capacity of less than or equal to 13 persons (including the driver), goods transport agencies, vessels and aircraft, except for a few cases. So as an exception, ITC is allowed in the below cases:
    • Such motor vehicles and conveyances are further supplied i.e. sold.
    • Transport of passengers and goods.
    • Conveyance is used for imparting training on driving, flying, and navigating such vehicles or conveyances.
  2. Services of general insurance, servicing, repair and maintenance relating to motor vehicles, vessels or aircraft in Sl. no.1.
  3. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery.
    But if the goods and/or services are taken to deliver the same category of services or as a part of a composite supply, the input tax credit will be available
    Example: Mr Dev purchases cosmetic creams to supply it to a customer, then ITC on purchases will be allowed.
  4. Membership in a club, health, and fitness centre.
  5. Rent-a-cab, health insurance and life insurance except in the following cases where it is allowed:
    • Government makes it obligatory for employers to provide it to their employees by law. For example, the mandatory cab services for female staff in night shifts.
    • Goods and/or services are taken to deliver the same category of services or as a part of a composite supply, input tax credit will be available.
      For example, if Mr Dev takes the service of rent-a-cab to supply to Mr Manoj, a customer, then the ITC on purchases will be allowed.
    • Leasing, renting or hiring motor vehicles, vessels or aircraft, except cases in Sl.no. 1.
  6. Travel benefits are extended to employees on vacation such as leave or home travel concessions.
  7. Works contract service for construction of an immovable property (except plant & machinery or for providing a further supply of works contract service).
  8. Goods and/or services for the construction of an immovable property whether to be used for personal or business use.
  9. Goods and/or services where tax has been paid under the composition scheme.
  10. Goods and/or services used for personal use.
  11. Goods or services or both are received by a non-resident taxable person except for any of the goods imported by him.
  12. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
  13. ITC will not be available in the case of any tax paid due to non-payment or short tax payment, excessive refund or ITC utilised or availed by the reason of fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.
  14. Special cases: Standalone restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.

For further explanation of ineligible ITC claims, read our article on ‘Ineligible ITC under GST’.

ITC claims if the place of supply is not the state of the GST-registered recipient

Where one rents a hotel room for business purposes or pays freight forward charges, the place of supply differs from the recipient’s state of GST registration. So, the Input Tax Credit (ITC) is not made available in such cases.

No particular provisions restrict this claim, but from a state revenue point of view, ITC is not available to the recipient of one state since another state accrues the revenue. Further, Form GSTR-2B classifies this as an ineligible ITC for the recipients.

The CGST Circular 184/16/2022, issued on 27th December 2022, has clarified the below in another similar case.

The Circular clarifies the availability of ITC claims for GST-registered persons in India who buy services of transportation of goods/mail/courier if the destination of such transportation/mail/courier is outside India.

With effect from 1st February 2019, the place of supply, in the above case, has been the place outside India or a foreign country.

Further, the transaction will be regarded as an interstate supply since the location of the supplier is in India and the place of supply is outside India. Accordingly, IGST is levied in such a transaction.

The Circular further clarifies that the person buying such a service can claim ITC on the transportation/courier bills.

Accordingly, the transporter/courier company can report the state code as ‘96-Foreign Country’ in GSTR-1 while reporting the place of supply for the service.

Clear Solutions to claim accurate and 100% ITC

Many conditions are there to claim ITC before the last date passes. An Indian enterprise must verify the ITC details before claiming it in Form GSTR-3B for a tax period. It involves regular reconciliation of GSTR-2B with books of accounts. Further, it requires frequent follow-ups with suppliers who have not reported tax invoices or debit notes. 

All these require a robust and smart solution that requires the least manual effort! 

Clear GST ensures that your GSTR-2B data is fetched without manual intervention. Our advanced reconciliation engine matches data between books and GSTR-2B to identify gaps, with the option to define custom matching logic and claim 100% ITC in GSTR-3B. 

Clear GST also allows users to annually reconcile ITC across financial years for accurate preparation of GSTR-9 and GSTR-9C.

Clear Max ITC  is India’s first end-to-end enterprise solution for maximising the claims of the input tax credit. Clear Max ITC platform has exclusive features to improve your input tax credit claims with value additions such as the following-

1. It hosts the fastest AI-based reconciliations to match invoices without any errors and help you identify 100% ITC.

2. Automated data reconciliations take place by direct data pulls from the GSTN and the ERP at regular intervals.

3. Automated vendor communication helps you to keep follow-up efforts at a bare minimum.

4. Smart payment decisions are synced to a business’s ERP based on automated vendor categorisation through an intelligent vendor scoring mechanism.

5. Advanced user access management helps you define access rights for each team and keeps data absolutely secure.

The platform firstly sets up a two-way connection between it and your ERP/accounting system. It schedules automatic reconciliations of the GST details at regular time intervals and also syncs vendor payment decisions. 

Your team can fix the vendor payment terms to automatically hold the GST value or the entire invoice due if your vendor has not filed GST returns. It further syncs this decision with the ERP for all future payments. If any invoice is missing and identified so, communication is auto-sent to the concerned vendor via email, WhatsApp, etc.

With passing time, you will notice that the Clear Max ITC solution has helped you reduce the number of defaulting vendors, optimise input tax credit, and unblock your working capital. We’ve seen that the solution has helped many of our clients reduce their GST cash outflows and Increase profits by up to 7% just by way of ITC maximisation.

Explore the Clear Max ITC solution by requesting a demo: https://cleartax.in/s/max-itc

For further understanding, read more articles on ITC-

Basics of input tax credit explained

Removal of provisional ITC and restricting it to GSTR-2B from 1st Jan 202

All about adjustment of Input Tax Credit under GST

Document and forms for claiming ITC under GST

Optimising credits in the amended Rules for Input Tax Credit utilisation

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