Guide on Input Tax Credit under GST

GST is set to revolutionize the world of Indian indirect taxation and Input Tax Credit is one of its key features which will help in eliminating 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/ input. So when you are required to pay tax on the finished good/ output, you can reduce the tax that you already paid and just pay the remaining tax liability.


Key Terms Related to Input Tax Credit under GST India


What is Input?

Under GST law, the term input denotes goods except capital goods used by a supplier during his business to make outward supplies.

What is Input Service?

This term denotes any service used by a supplier during his business to generate supplies outwards.

What is Input Tax?

Input tax is a tax imposed on the person when he receives supply of goods & services which are used for his business.

What is Electronic Credit Ledger?

It is an electronic credit ledger for ITC to be maintained on the common portal.

What is Electronic Cash Ledger?

It is an electronic cash ledger to be maintained at the common portal for each taxable person registered under GST.


How & When can you Claim your Input Tax Credit?

The conditions necessary for getting the benefit of ITC and the timeline for claiming it is given below:


Conditions Necessary to get Entitlement of Input Tax Credit under GST

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

To get the benefits of ITC, you must satisfy the following 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
  • You can credit ITC in your Electronic credit Ledger on the common portal in a provisional manner as prescribed in the model GST law.
  • 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 under section 27 like GST-1, 2, 2A, 6, 6A, 7, 7A.
  • For goods which are received in lots, you can claim ITC only after you have received the final lot.

ITC is Not Available to be Claimed in the Following Cases, u/s 16(9):

  • You cannot claim ITC for goods & services used for personal purposes.
  • If you have acquired goods & services under a contract which results in contraction of immovable property other than plant & machinery.
  • If you have paid tax on goods & services under GST composition scheme.
  • If goods & services have been used to build immovable property other than plant & machinery & such property is not transferred.
  • Such goods & services which have been used by employees for their personal consumption.
  • If depreciation has been claimed on the cost of capital goods, then they are not eligible for Input Tax credit.


Time Limit for Availing 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 preceeding 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 (u/s 7)


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:

  • Before filing of valid return for the month of September (under section 27) following the end of F.Y. to which such invoice is related, or
  • Before filing of the annual return

As per section 30, the last date for filing of annual return is 31st December following the end of the financial year.


How is Input Tax Credit Used?


If ITC has been received on account of CGST

  • It should first be used to pay CGST.
  • Then, any remaining amount should be used to pay IGST.
  • Note that you cannot use ITC of CGST to pay SGST.

If ITC is received on account of SGST

  • It should be used to pay SGST first.
  • Then, any remaining amount should be used to pay IGST.
  • Note that you cannot use ITC of SGST to pay CGST.

If ITC is received on account of IGST

  • It should be used to pay IGST first.
  • Then, any remaining amount should be used to pay CGST.
  • The last priority should be given to payment of SGST.

Claiming Input Tax Credit Against Inputs Sent for Job Work

As a registered taxable person you can also claim ITC on inputs sent to gob-workers if the following conditions are satisfied:

  • You should receive such input back within 180 days.
  • If the inputs involved are capital goods, then you should get such inputs back within 2 years.
  • If you fail to receive inputs within the above mentioned time period, then you will have to pay an amount equal to ITC claimed along with interest.
  • However, you are still allowed to reclaim ITC if inputs or capital goods are received back from the place of business.

Reversal of Input Tax Credit

  • Proportionate amount of ITC will be reversed if goods or services are used for business or non-business purposes.
  • ITC will be allowed on taxable supplies including zero-rated supplies.

Input Tax Credit on Supply of Capital Goods

  • A registered taxable person is liable to pay tax on such a supply of capital goods on which ITC has already been claimed.
  • This amount should be equal to ITC claimed after reducing it by prescribed percentage points or the tax applicable on the transaction value of such capital goods, whichever is higher.

Matching Mechanism for ITC Monitoring

  • A matching mechanism has been developed to make sure there is no duplication in claiming ITC.
  • It ensures that inward supplies returns filed by receiver matches outward supplies returns filed by supplier.
  • Matching mechanism also helps in matching ITC claims with customs paid where goods are imported by registered taxable person.
  • Any discrepancy which arises post verification is intimated to both parties so that they can make necessary corrections within the prescribed time frame.

Carry Forward of CENVAT and VAT Credit

  • This year, when taxable persons move from indirect tax regime to GST regime, they will be presented with an opportunity to carry forward their CENVAT & VAT credit.
  • The credit which has been carried forward, will be reflected in the electronic credit ledger of the registered taxable person.

Conditions Necessary to Carry Forward your Credit

Your CENVAT should satisfy the following two conditions before you can claim it:

  • It should qualify as acceptable ITC under both indirect tax as well as GST regime.
  • Such credit should appear as input credit carried forward in the return filed for the last period of existing law.
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