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.
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.
Let us now use an example to understand how to claim your input tax credit:
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:
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.
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
You can be entitled to Input Tax Credit if you satisfy the below-mentioned conditions:
You cannot claim Input Tax Credit in the following cases:
Time Limit for Claiming ITC
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|
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:
Note: As per section 44, the last date for filing of annual return is 31st December following the end of the financial year.
The GST comprises of 3 types of taxes: CGST, SGST and IGST
[ Read: Types of GST in India ]
The three tax credits can be used to offset one another.
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.
To claim input tax credit, you will need the following documents:
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.
Input Service: This term means any service used or intended to be used by a supplier in the course or furtherance of business.
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.
Electronic Credit Ledger: It is like a passbook containing all the credits you have accumulated and is maintained on the common portal.
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.
[ Read: e-Ledgers in GST ]
After implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.