Input Tax Credit Under GST: How it works, Rules, Claim, Documents required and Utilization

What is Input Tax Credit in GST?

Input Tax Credit (ITC) is one of the fundamental features of the Goods and Services Tax (GST) regime. It is a mechanism that enables businesses to claim a credit for the taxes paid on their purchases, which can be set off against the tax payable on their sales. In other words, it allows businesses to reduce their tax liability by the tax already paid on their purchases.

Under GST, businesses can claim Input Tax Credits for taxes paid on the inputs or services used during their business. This includes taxes on goods and services used for business purposes, such as raw materials, capital goods, office supplies, and legal and accounting services.

Input Tax Credit can be claimed only if the recipient of the goods or services has a valid tax invoice or other prescribed document evidencing the tax payment. The supplier of goods or services must have filed their GST returns and paid the tax due on their supplies.

However, certain restrictions on the Input Tax Credit can be claimed, such as restrictions on certain goods and services and conditions for claiming Input Tax Credit. For instance, businesses cannot claim Input Tax Credits for goods and services used for personal consumption. There are specific rules for claiming Input Tax Credits for goods and services used for business and personal purposes.

Overall, the Input Tax Credit is a crucial mechanism under GST that helps businesses to reduce their tax liability and encourages them to maintain proper records of their purchases and sales.

How does the Input Tax Credit work?

A manufacturer purchases raw materials worth Rs. 50,000 from a registered dealer and pays GST of Rs. 9,000 (@18%). The manufacturer uses these raw materials to manufacture finished goods, charging GST of Rs. 12,000 (@18%) when he sells them to his customers.

In this case, the manufacturer can claim ITC on the GST paid on raw materials (Rs. 9,000) as he has used them in his business. The ITC available to him would be Rs. 9,000.

The amount of GST payable by the manufacturer to the government would be calculated as follows:

GST payable = GST collected on sales (Rs. 12,000) – ITC available (Rs. 9,000)

Therefore, in this case, the GST payable by the manufacturer to the government would be Rs. 3,000 (Rs. 12,000 – Rs. 9,000).

So, the manufacturer can reduce the GST payable on his output (i.e., the finished goods he sells) by claiming ITC on the GST paid on his inputs (i.e., raw materials). This helps to avoid double taxation and ensures that GST is only levied on the value added at each stage of the supply chain.

GST Input Tax Credit Rules:

The GST Input Tax Credit (ITC) Rules lay down the conditions for claiming ITC by a registered taxpayer. Some of the fundamental rules are:

1. Eligibility: A registered taxpayer can claim ITC only if they are engaged in taxable supplies and are registered under GST.
2. Document requirement: To claim ITC, a taxpayer must have a tax invoice or other prescribed documents, such as a debit note, bill of entry, or invoice issued by the Input Service Distributor (ISD).
3. Time limit: The taxpayer must claim ITC within the earlier of the following two dates: (a) the due date of filing the return for September of the following year or (b) the actual date of filing the annual return.
4. Reversal of credit: If the taxpayer uses the goods or services for non-business or exempt supplies, they must reverse the proportionate ITC. Similarly, if the taxpayer does not pay the supplier within 180 days, the ITC claim must be reversed.
5. Blocked credits: Certain goods and services are not eligible for ITC, such as motor vehicles and related services, food and beverages, and membership in a club, among others.
6. Apportionment of credit: If taxpayers use goods or services for taxable and non-taxable supplies, they must apportion the ITC and claim a credit only for the proportion used for taxable supplies.
7. Matching of invoices: The ITC claimed by the taxpayer must match the details uploaded by the supplier in their return, failing which the credit may be disallowed.

Overall, the GST Input Tax Credit Rules aim to ensure that the credit claimed by a taxpayer is genuine and used only for taxable supplies while also preventing double taxation or cascading of taxes.

Ineligible to claim ITC:

Under GST, there are certain cases where a registered person is ineligible to claim Input Tax Credit (ITC). Some of the common scenarios where ITC cannot be claimed are:

1. Motor vehicles: ITC cannot be claimed for the purchase of motor vehicles and other conveyances, except when they are used for taxable supplies, transportation of goods, or providing services like a driving school.
2. Food and beverages: ITC cannot be claimed for food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery unless these are part of the taxable person’s business.
3. Membership of clubs: ITC cannot be claimed for club or health and fitness centre membership.
4. Rent-a-cab services: ITC cannot be claimed for rent-a-cab services except when the same is used to provide further supply.
5. Works contract services: ITC cannot be claimed for works contract services for constructing an immovable property, except where the said property is an input for further supply of works contract services.
6. Goods and services used for personal consumption: ITC cannot be claimed for goods and services used for personal consumption.
7. Blocked credits: ITC cannot be claimed for certain blocked credits, such as tax paid under the composition scheme, tax paid on supplies used for non-business purposes, and tax paid on supplies that are exempt from tax.

Taxpayers need to understand these rules to ensure they claim only eligible ITC and avoid any penalties for non-compliance.

Documents required for availing ITC:

To avail Input Tax Credit (ITC) under GST, the following documents are required:

1. Tax invoice: A tax invoice is issued by the supplier of goods or services when the sale is made. It contains details of the supplier, recipient, nature of goods or services, and the tax charged.
2. Debit note: A debit note is issued by the supplier of goods or services when there is an increase in the tax charged or a decrease in the taxable value of the goods or services.
3. Bill of entry: A bill of entry is a document required for goods imported into India. It contains details of the goods, their value, and the customs duty paid.
4. Input Service Distributor (ISD) invoice: An ISD invoice is issued by an Input Service Distributor to distribute the input tax credit to its branches or units.
5. Document issued by a person liable to pay tax under reverse charge: When the recipient is liable to pay tax under reverse charge, the document issued by such a person can be used for availing ITC.
6. Receipt voucher: A receipt voucher is issued for the receipt of goods or services, and it contains details of the supplier, the goods or services, and the tax paid.
7. Payment voucher: A payment voucher is issued for the payment made for the goods or services, and it contains details of the supplier, the goods or services, and the tax paid.

It is important to note that these documents should have the recipient of goods or services avail of an Input Tax Credit. The documents should also comply with the rules and regulations under the GST law.

Time limits for claiming ITC under GST:

Under GST, the time limit for claiming Input Tax Credit (ITC) is as follows:

• The recipient of goods or services can claim ITC based on the invoice or debit note issued by the supplier. The recipient can claim ITC in the tax period if the supplier uploads the invoice or debit note. The last date for claiming ITC for the financial year is the earlier of the following two dates:

1. The date of filing the GST return for September of the subsequent financial year.
2. The due date for filing the annual return for the relevant financial year.

• In case of the recipient is not availing the ITC in the tax period in which the invoice was uploaded, the ITC can be availed in any subsequent tax period before the due date of filing the GST return for September of the subsequent financial year or before the due date for filing the annual return for the relevant financial year, whichever is earlier.

It is important to note that the ITC can only be claimed if the supplier has uploaded the invoice or debit note in the GST portal and has paid the GST to the government.

• Done by comparing the GSTR-2A with the GSTR-3B returns filed by the business.

Here is an example to illustrate how availing of ITC works:

Let’s say a business purchases goods worth Rs. 1,00,000 from a registered supplier at a GST rate of 18%. In this case, the supplier would charge Rs. 18,000 as GST (18% of Rs. 1,00,000) and issue a tax invoice to the business. The business can claim the entire Rs. 18,000 as ITC while filing their GST return, provided they have valid tax invoices and have used the goods for business purposes.

If the business subsequently sells the goods for Rs. 1,20,000, they would charge GST at the applicable rate (let’s assume 18%) on the sale value, i.e., Rs. 21,600 (18% of Rs. 1,20,000). The business would then deduct the ITC of Rs. 18,000 from the GST liability of Rs. 21,600 and pay only the net GST of Rs. 3,600 to the government.

ITC Utilization

ITC utilization refers to using input tax credit (ITC) accumulated on purchases of goods or services to offset the GST liability on the output supply. In other words, it is utilizing the credit balance available in the electronic credit ledger to pay for the GST liability on the output supply.

Under GST, a registered taxpayer can utilize ITC to pay for the tax liability on the supply of goods or services. The utilization of ITC is subject to certain conditions and restrictions. For example, ITC can only be used to offset the output tax liability in the same tax period, and there are certain types of goods and services for which ITC cannot be used.

Let’s take an example to understand the ITC utilization process:

Assume that a manufacturer purchases raw materials worth Rs. 1,00,000 at a GST rate of 18%, which amounts to a total tax of Rs. 18,000. The manufacturer uses these raw materials to manufacture finished goods, which are sold at Rs. 1,50,000 at a GST rate of 18%, which amounts to a total tax of Rs. 27,000.

Now, the manufacturer can utilize the ITC accumulated on the purchase of raw materials to offset the GST liability on the output supply of finished goods. In this case, the ITC available for utilization is Rs. 18,000. Therefore, the GST liability on the output supply of finished goods is reduced to Rs. 9,000 (Rs. 27,000 – Rs. 18,000).

The manufacturer can use the remaining ITC of Rs. 9,000 to offset the GST liability on the subsequent output supplies. However, it is essential to note that the utilization of ITC is subject to certain conditions and restrictions as per the GST laws and regulations.