Input Tax Credit

Input Tax Credit - Easy Steps to claim ITC under GST

Meaning of Input Tax Credit

Input Tax Credit (ITC) keeps taxpayer from having to pay taxes twice. A business is required to pay taxes on materials and ingredients it purchases. But with Input Tax credit, the business can utilize these input credit to reduce the tax liability payable on the sale. It functions similarly to a tax rebate for taxes already paid. This lowers taxes for businesses and improves the fairness of the tax system. It is a special rule designed to prevent taxes from increasing and driving up prices.

Input Tax credit under GST

Under GST, the Input Tax Credit (ITC) is equivalent to a refund of the taxes you pay on purchases made for your company. When you sell your goods or services, you can use this refund to reduce your taxes. It guarantees that you pay taxes on the same amount of money only once. It's similar to receiving a portion of your tax refund. This maintains equity and saves money for businesses. We will examine Input Tax Credit (ITC) under GST in this article.

For Instance, You pay the tax on purchases when you buy a good or service, and you get paid the tax when you sell it. Utilizing the input tax credit in GST in the eway bill is the process by which the tax you paid on purchases must now be subtracted from the amount of output tax, or the tax collected on sales, and the remaining tax must be paid to the government. Now let’s understand what is input tax credit with practical questions in GST entry: Suppose Mr Karan purchased goods worth Rs70000 on which GST is 18% i.e. Rs.12600 and, MR. Karan sold goods worth Rs.100000 on which GST payable is 18% i.e. Rs.18000.

Particulars	Amount (Rs.)
GST payable on sale	18000
GST paid on purchase	12600
Net GST payable	5400

Important Requirements to claim GST Input Tax Credit

A taxpayer needs to meet the below requirements in order to claim input tax credit under GST:

Correct Invoice: The taxpayer must have completed the process of vouching invoices. This involves verifying the details of invoices uploaded by the supplier with records of taxpayer. Any differences should have been resolved and the correct input tax credit after necessary adjustments should have been determined.

Valid Documents: The taxpayer must have a valid tax invoice, debit or credit note, or supplemental invoice from the supplier for the goods or services purchased.

Receiving the Goods or Services: In order to be eligible for an input tax credit, the taxpayer must have received the goods or services.

Confirmation of Tax paid by supplier: It is important to confirm that the supplier has paid the correct amount tax to the government. If the suppliers has not paid the taxes properly paid to the authorities, in such case input tax credit cannot be claimed.

When Can You Claim GST Input Tax Credit?

GST Input Tax Credit can be claimed by you in different situations:

Switched from Composite to Regular Taxpayer: If annual turnover is more than Rs.50 Lakhs and you switch from the composition scheme to a regular taxpayer, you can claim input tax credit on inputs, goods in stock, and capital goods from the day before you switch. However Input tax credit on capital goods might reduce by a certain percentage.

Registered under GST: If you have registered your business under GST, you can claim input tax credit on inputs and goods in stock from the day before you become liable to pay tax. However you must apply for registration within 30 days and get approved.

Voluntary Registered under GST: If you have voluntarily registered your business under GST, you can claim input tax credit on inputs and goods in stock from the day before your registration is approved.

Combined use of input goods and services: You may only claim Input Tax Credit (ITC) on the portion of products or services utilized for business if you use them for other purposes as well.

Exempt Taxable and Supplies: if you utilize Input good and services for exempt or taxable supplies both, you may only claim the ITC on the part of goods or services used for zero-rated and taxable supplies

Non Taxable to Taxable: You can claim Input Tax Credit (ITC) on stock goods and inputs related to taxable products once non-taxable items become taxable. Additionally, you may (with a decrease) claim credit for capital assets that are utilized just for those taxable items.

Receipt of Goods in Parts: You can only make an ITC claim for products that are delivered in parts after you get the final piece.

Pipelines and Towers: For telecom towers and pipelines, you can claim ITC progressively. 1/3 in the year of purchase, 2/3 in the following year (with the help of last year's credit), and the remaining 1/3 in the following year.

Business Changes: If there is a provision, you may be able to transfer any unused ITC to the new firm in the event that your company is sold, merged, demerged, amalgamated, leased, or transferred.

Cases Where You Can’t Claim Input Tax Credit under GST

There are certain situations where you won’t be able to claim Input Tax Credit (ITC) under GST:

GST Registration Delayed

To prevent losing out ITC on input and goods-in-stock, you must apply for GST registration within 30 days of becoming liable to pay GST

Breaking over Time Limits

Input tax credit must be claimed within the earliest of these dates:

1 year from the date of invoice,

In the return for September of the next financial year (by October 20th), or

In the annual return (by December 31st of the next financial year).

Delayed Payment

If you haven’t make the payment to supplier for supplies received within three months from the invoice date, the claimed ITC will be added back to GST liability and interest.

Motor Vehicles and Conveyance

Unless they are further supplied, used for transporting passengers or goods, or for training purposes, Input tax credit isn’t claimed for motor vehicles and conveyance.

Other cases

ITC is not recoverable in a number of situations, including as club membership, health and fitness center membership, taxi services, employee life and health insurance (except compulsory services), some food and beverage services, outdoor catering, cosmetic surgery, and more. In addition, commodities used for personal use, exempt supply, reverse charge basis, and situations involving lost or disposed of products are not eligible for ITC.

Special Cases of GST Input Tax Credit

1. Input tax credit on Capital Goods purchased

For capital goods under GST, you are eligible for Input Tax Credit. But there are several exceptions:

• If capital goods are used only to produce exempted products, they are not eligible for ITC.
• Additionally, capital goods purchased only for non-business reasons are not eligible for the ITC.
• ITC will not be allowed if depreciation has been claimed on the tax component of capital goods.

2. Input tax credit on Job Work received

Sometimes, a manufacturer may finish one part of the production process only and sends goods to a job worker for more work that is called “Job work”. In this case:

• Credit for taxes paid on items used in this process may be claimed by the main manufacturer.
• When such goods are sent directly from the main facility or the supplier’s place, then ITC is available.

3. Input tax credit by Input Service Distributor (ISD)

A registered person's main office, branch, or registered office is known as an input service distributor (ISD). Based on their purchases, ISD provides input tax credits to recipients in categories such as CGST, SGST/UTGST, IGST, or less.

Documents required for Claiming Input Tax Credit under GST

The following documents is required in order to claim an Input Tax Credit (ITC):

• Bill of Entry: You should have the proper the Bill of Entry or similar documents for imported goods.
• Invoice from Supplier: You should have the proper invoice issued by the supplier for the goods or services purchased.
• Credit Note from Supplier: You should have the proper credit note issued by the supplier to correct errors or update details in case there is decrease in original invoice value.
• Debit Note from Supplier: You should have the proper debit note issued by the supplier to correct errors or update details in case there is increase in original invoice value.
• Valid Document from ISD: You can use invoices or credit notes that are given by the Input Service Distributor (ISD) if you are a part of input service distribution scheme.

Time limit for Claiming Input Tax Credit (ITC) under GST

If the proper tax invoice is issued by supplier within a year:

• A person can claim input tax credit from the day they become eligible for tax if they are registered under GST, have applied for registration, or plan to register.
• A GST-registered individual can claim an Input Tax Credit (ITC) when they start paying taxes on a regular basis after switching to the composition levy scheme.
• Those that voluntarily register for GST are eligible to collect Input Tax Credit (ITC) as soon as they register under GST

If the proper tax invoice is issued by supplier for More Than a Year:

• The last date is before the September GST monthly/quarterly return is filed, which comes after the financial year ends.
• As an alternative, it needs to be claimed prior to submitting the annual GST return.

Steps to claim an input input tax credit under GST

Input tax credit can be claimed under GST if the following process is followed:

1. Submit a monthly return using form GSTR-3B, showing your input tax credit and output tax liability.
2. Verify the information about the input tax credit on form GSTR-2B, an automatically generated statement derived from the supplier returns.
3. Check for differences in form GSTR-2B and the claimed input tax credit, and make any necessary corrections in the following month's return.
4. Make sure you pay any interest and penalties (if any) associated with any excess input tax credit that you have claimed.

Conclusion

The GST system benefits from input tax credit by ensuring a smooth flow of credits while easing the tax burden on businesses. You can benefit from GST and increase your cash flow and profitability by complying with the guidelines and processes for claiming input tax credit.