Know the key terms related to Input Tax Credit under GST and the valid conditions under which you can claim your credit. Read more in this guide by earlyGST

Guide on Input Tax Credit under GST Regime in India

Last Update Date : April 06, 2018

GST has revolutionised the Indian indirect taxation and Input Tax Credit is one of the key features, which has helped in eliminating the cascading effect of taxes. This guide will help you in understanding everything you want to know about ITC under GST.

What is Input Tax Credit?

When you buy raw materials as inputs to create and sell your product, you pay tax on the material or input. So when you are required to pay tax on the finished good or output, you can take the deduction of the tax that you have already paid on such inward materials and just pay the balance as the net tax liability.

Key Terms Related to Input Tax Credit under GST in India

What is Input?

Under GST Act, input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

What is Input Service?

This term means any service used or intended to be used by a supplier in the course or furtherance of business.

What is Input Tax?

Input tax in relation to a registered person means the Central tax, State tax, Integrated tax or Union Territory tax charged on any supply of goods or services or both made to him. It is important to note that Input tax does not include the tax paid under the Composition levy.

What is Electronic Credit Ledger?

It is like a passbook containing all the credits you have accumulated and is maintained on the common portal.

What is Electronic Cash Ledger?

It is similar to a passbook which contains all the taxes you have paid on the supplies and is maintained at the common portal for each taxable person registered under GST.

How & When can you claim Input Tax Credit?

Conditions Necessary to claim Input Tax Credit under GST

You can be entitled to Input Tax Credit if you satisfy the below-mentioned conditions:

  • You must be registered as a taxable person under GST.
  • Goods & services on which you want to claim ITC should have been used only for business purposes.
  • ITC can be claimed on taxable & zero-rated supplies (exports).
  • If the constitution of registered taxable person changes due to sale, merger or transfer of business, then unused ITC shall be transferred to the sold, merged or transferred business.
  • To claim ITC, you need supporting documents like tax invoice, debit note, supplementary invoice, etc.
  • You can claim ITC if you have actually received some goods & services.
  • To claim ITC, the Input Tax must be paid through electronic cash ledger or electronic credit ledger.
  • It is mandatory to file all the applicable GST returns.
  • For goods which are received in lots, you can claim ITC only after you have received the final lot.

When Can you not Claim ITC?

You cannot claim ITC in the following cases:

  • If you have acquired goods & services under a contract which results in the construction of immovable property other than plant & machinery.
  • If you have paid tax on goods & services under GST composition scheme.
  • Such goods & services which have been used by employees for their personal consumption.
  • If depreciation has been claimed on the cost of capital goods (including ITC amount), then they are not eligible for Input Tax credit.
  • No ITC can be claimed for goods or services used for personal purposes.

Time Limit for Claiming GST Input Tax Credit in India

A registered taxable person can get ITC in the prescribed time and manner. In the table given below, you can see different situations in which inputs can be claimed for stock or semi-finished goods or finished goods.

Situation Details Day on which ITC can be claimed for stock, SFG or FG (held on immediately preceding day)
1 If a person is liable to registration, or applied for registration, or is granted registration The day from which he becomes liable to pay tax
2 If a person takes voluntary registration The day of registration
3 A registered taxable person who stops paying tax under composition levy scheme The day from which he becomes liable to tax normally

Other conditions

ITC mentioned for above situations can be claimed only within one year from the date of issue of tax invoice relating to supply. In any other case, the last date to claim ITC is earlier of the two below:

  • Before the filing of valid return for the month of September following the end of FY to which such invoice is related, or
  • Before the filing of the annual return

Note: As per section 44, the last date for filing of annual return is 31st December following the end of the financial year.

How is ITC Calculated?

At each stage of the supply chain, the buyer gets credit for the input tax paid, and they can use it to offset the GST that needs to be paid to the Centre and State governments. To understand this concept better, let’s take the example of a company called XYZ Tyres Company which sells custom-made tyres.

  • They purchase rubber worth Rs 4,000 from a vendor at a GST rate of 12.5%. Thus, the input tax they pay is Rs 500.
  • The company now sells the manufactured tyres for Rs 8,000, plus an output tax of 12.5%, making the total selling price Rs 9,000 (Rs 8,000 + Rs 1,000).

Thus, the tax that XYZ Tyres Company owes to the tax department or the government = Output tax – Input tax credit = Rs 1,000 – Rs 500 = Rs 500

Documents Required to Claim ITC

To claim input tax credit, you will need the following documents:

  • Invoice issued by the supplier
  • In case the total amount is less than Rs 200 or a case where reverse charge mechanism is applicable, the invoice issued by the supplier which is similar to Bill of Supply
  • Debit note issued by the supplier (if any)
  • Bill of Entry or similar documents issued by the Customs Department
  • Bill of Supply issued by the supplier
  • Document issued by ISD could be an invoice or credit note

Reconciling and Claiming ITC

The GST comprises of 3 types of taxes: CGST, SGST and IGST

  • CGST (Central GST) – Levied and Collected by the Central Government for transactions within the same state
  • SGST (State GST) – Levied and Collected by the State Governments for transactions within the same state
  • UTGST (Union Territory GST) – Levied Collected by the Union Territories for transactions within the same Union Territory
  • IGST (Integrated GST) – Single levy collected by the Central Government for transactions between states

The three tax credits can be used to offset one another.

CGST credit

  • It can be used to offset CGST liability
  • If there is credit left over, it can be used to clear the next IGST liability

SGST credit

  • It can be used to offset SGST liability
  • Any leftover credit can be used to clear the next IGST liability

UTGST credit

  • It can be used to offset UTGST liability
  • Any leftover credit can be used to clear the next IGST liability

IGST credit

  • It can be used to offset IGST liability
  • Any leftover credit can be used to clear CGST liability first and then clear SGST / UTGST liability.

Reconciliation of these credits is done by matching your transactions with those of your customers or vendors. This will help the Tax Department in verifying the transactions from both ends. The GST Identification Number (GSTIN) is used to match transactions together.

How to Claim and Reconcile Input Tax Credit – Example

Let us now use an example to understand how this reconciliation process works:

Suppose a company named XYZ Tyres Company (recipient) made a purchase of 10 tons of rubber from another company named ABC Rubber Company (supplier). Both the companies are registered for GST. The two companies will reconcile their transactions, and the recipient will claim the input tax credit, as follows:

  • ABC Rubber Company will file the GSTR-1 report (Details of outward supply).
  • The details furnished in the GSTR-1 will be automatically fetched in the GSTR-2A (Details of inward supply) for XYZ Tyres Company, where they will be able to see the transaction details.
  • XYZ Tyres Company will then check the records and make any necessary modifications / additions if any.
  • Once the changes are made, this information will be automatically pulled when they will file the GSTR-2. The correct input credits will then be credited to their electronic credit ledger.
  • ABC Rubber Company can then use the GSTR-1A form to view and accept the changes that XYZ Tyres Company made in the GSTR-2.
  • Finally, once ABC Rubber Company has filed the monthly returns (GSTR-3) and has paid the respective tax liability, XYZ Tyres Company will be able to avail the input tax credit and apply it to future output tax liabilities.
  • In cases where the tax on purchases is higher than the tax on sales, the extra input credit can be carried forward or claimed as refund.

Reconciliation is an important part of filing accurate GST returns and claiming Input Tax Credit. Co-ordinating with numerous vendors and reconciling returns can be a very tedious task but you do not need to worry about it. Our experts at earlyGST can take care of this process for you so that you can focus more on making profits while we take care of compliance.

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