Input Tax Credit Under GST

After the GST implementation, there is a major overhaul of indirect taxation. Input refers to any goods which are used by the business to create the finished products provided to the end-users.

The main motive of bringing input tax credit under GST is to eliminate the effect of cascading taxation which was witnessed previously during the VAT regime. In the case of GST, tax applies to good or service only once. One of the key mechanisms using which the GST regime eliminates cascading taxes is the input tax credit or ITC mechanism.

Understanding the working of Input Tax Credit

GST payable on the supply of final output of a manufacturer = Rs 450

GST paid on inputs = Rs 300

In such a case, the manufacturer can claim Rs 300 GST paid as ITC

Net tax payable at the time of supply down = 450-300 = 150

This is the way; how the cascading effect of taxation is prevented.

Who can Claim Input Tax Credit?

Input Tax Credit is available only to those individuals or businesses who have registered under the GST Act. This is in effect means that Input Tax Credit can be claimed by a wide range of businesses or individuals including but not limited to aggregates, service providers, e-commerce operators, suppliers, agents, and manufacturers.

In all the above scenarios, input tax credit claims can be made by the GST registered business/individuals on tax paid for the purchase of any business relevant inputs. Know more about GST Registration.

Eligibility of Input Tax Credit

•  The availability of the GST invoice showing details of tax paid is mandatory.
• The goods on which GST has been paid have been received.
• The applicant has submitted the relevant tax returns.   
• The supplier of the goods has paid due tax to the government.
• The ITC applicant is registered under GST.
• If goods have been received in installments, ITC can be claimed only after the receiving of a final product.

Input tax credit cannot be claimed in the following cases:

• Composition tax registered businesses/individuals paying GST on inputs.
• If depreciation has been claimed on the tax component of a capital good.
• On goods not used as business inputs such as supplies for personal use.
• On goods on which ITC is not applicable under the GST Act such as exempt supplies.

Documents Required to Avail Input Tax Credit

One or more of the following key documents are required for claiming input tax credit:

• Invoice provided by as supplier of goods/services
• Debit note issued by the supplier to the recipient (if applicable)
• Bill of entry
• Bill of supply (maybe a replacement for tax invoice in certain cases)
• Credit note/invoice issued by input service distributor (ISD) as GST invoicing rules 
• A bill of supply issued by the supplier of goods/services

The relevant document(s) need to be furnished when filing GST returns using GSTR-2 to apply for ITC.

Input Tax Credit for Capital goods

As per the GST Act, Capital goods are defined as assets such as tools, vehicles, buildings, and machinery which an organization may utilize to produce goods and services. According to the GST rules, GST is paid for the purchase of capital goods is eligible for input tax credit subject to certain terms and conditions.

• One cannot claim for Input Tax Credit if capital goods purchased for minimum use.
• One cannot claim for Input Tax Credit if capital goods purchased for the manufacture of exempted goods.
• Input tax credit is not allowed if depreciation has been claimed on the tax component applicable to the capital good.

Input Tax Credit on Job Work

In some scenarios, the principal manufacturer of goods may send their product to a job worker to produce the final product for the end-user.

According to the GST Act, a job worker is defined as “any person who undertakes a treatment or process on goods belonging to another person”.

In such situations, the principal manufacturer will be allowed to obtain an input tax credit for GST paid on the purchase of goods sent to the job worker. 

Input Tax Credit can be claimed if:

• Supply of good occurs from the principal manufacturer’s place of business or
  
• Supply of goods occurs directly from the supplier contracted by the principal

It is a mandate for such goods to be received back by the principal within 1 year from the date of initial supply for the applicability of Income Tax Credit. The time given for Input Tax Credit in the case of capital goods is 3 years.

Input Tax Credit on Input Service Distributor

As per the GST rules, an “input service distributor” (ISD) can be the head office, registered office or branch office of a GST registered business. In case multiple offices are making purchases for business activities of the entity, the input service distributor can collect the Input tax credit on behalf of all the branch offices and distribute it under different heads such as IGST, CGST, SGST, UTGST or Compensation Cess.

Reconciliation of Input Tax Credit  

It is mandatory that the details mentioned in the Income Tax Credit application to exactly match the details provided in the supplier’s GST returns. If there is any kind of mismatch in these details, both Income Tax applicants and the supplier will receive a communication regarding the discrepancies via GST3 form. In such cases, the ITC claim must be resubmitted with applicable corrections.

Input Tax Credit reversal

In some scenarios, the Input Tax credit has been credited to the credit ledger of a registered business or individual which may be reversed.

Reasons due to which reversal input tax credit may occur are as follows:

• Input Tax Credit reversal can occur if invoices are not paid within 180 days counted from the issue date.
• In the case of ITC claims by ISD, the reversal can occur if a credit note is issued by the supplier.
• In case supplies are used for both business and non-business purposes, ITC reversal may be applicable in proportion to non-business usage of such supplies.
• The same may apply for Input Tax Credit on capital goods used for both business and non-business purposes.
• If total Input Tax Credit claimed on inputs exceeds the actual input tax credit reversed, then the balance amount is reversed.

The details of the reversal of input tax credit are furnished through the GSTR-02 form. Know more about GST Offline Tools to help you prepare your returns.

How to calculate the Input Tax Credit?

Input Tax credit has been credited to the credit ledger of a registered business or individual may be reversed.

The following are some reasons why the reversal of input tax credit may occur:

• If the invoices are not paid within 180 days counted from the issue date, then also ITC reversal can occur.
• In case the claim of Input Tax Credit makes by ISD, the reversal can occur if a credit note is issued by the supplier.
• In case the supplies used for both non-business purposes and business purposes, Input Tax Credit reversal may be applicable in proportion to the non-business usage of supplies. The same applies for Input Tax Credit on capital goods used for both business and non-business purposes.
• If total ITC claimed on inputs exceeds the actual input tax credit reversed, then the balance amount is reversed.

The details of the reversal of input tax credit are furnished through the GSTR-02 form. Know more about GST Offline Tools to help you prepare your returns.

Process to calculate the Input Tax Credit

Let’s assume there is Company ABC Textiles: Decides to claim the input tax credit on supplies which are ready made garments made from the cotton yarn.

Assume that to manufacture its finished product, primary input for the company is cotton yarn.

As per the current rules, GST on Cotton yarn is 5% = 2.5% CGST+2.5% SGST

On the other hand, the GST on ready made garments costing more than Rs. 1000 per piece is 12% (6% CGST + 6% SGST).

For cotton yarn purchases of Rs. 10,000 the GST paid by ABC Textiles = 5% of Rs. 10,000 = Rs. 500. This is the amount that can be claimed as ITC by ABC textiles.

For ready made garments sold worth Rs. 20,000 the GST payable (for the relevant period) = 12% of Rs. 20,000 = Rs. 2400.

Thus, by claiming back ITC on the purchase of cotton yarn from XYZ enterprises, the effective GST payable by ABC Textiles would be Rs. 2400 – Rs. 500 = Rs. 1900. 

Process to apply for Input Tax Credit

Following the above example, let assume that both ABC textiles and XYZ enterprises are registered under GST. Once the reconciliation of transactions of two companies has taken place, the recipient that is ABC textiles can claim Input Tax Credit as follows:

XYZ enterprises will provide the GST details payable on the cotton yarn using the GSTR-1 form.

The details filled in the GSTR-1 are automatically fetched to GSTR-2A as “Details of inward supply” for ABC textiles. GSTR-2A will also display the transaction details.

 Modifications or additions made by ABC textiles after checking the records, if required.

Based on details mentioned in the form GSTR-2A, input tax credit is automatically credited to the electronic credit ledger of ABC textiles. This can be used to offset a range of future tax liabilities of the business.

The Input Tax Credit, however, be reversed in case the monthly filing data of the companies does not match or due tax is not paid by either of the parties.