Input Tax Credit (ITC) under GST

1. Sales stage: When you sell your goods or services, you collect GST from your customer.

1. Adjustment: You then offset the GST you paid on your purchases (input tax) against the GST you collected on your sales (output tax).

1. Tax to be paid: If the output tax exceeds the input tax, you pay the difference to the government.

This process is called utilizing input tax credit.

Example:  You are a manufacturer:

1. Tax payable on output (final product) is Rs. 900

1. Tax paid on inputs (raw materials) is Rs. 600

In this case, you can claim an input credit of Rs. 600. The remaining tax of Rs. 300 will need to be paid in cash to the government.

Eligibility & Conditions for Claiming Input Tax Credit (ITC) under GST

To be eligible for claiming Input Tax Credit (ITC), a person must be registered under GST and meet a set of mandatory requirements. Below are the key conditions that need to be fulfilled in order to validly claim ITC on purchases or expenses made for business:

1. Must Have Valid Tax Documents:  A valid tax invoice, debit note, or any GST-compliant document issued by a registered supplier is necessary to avail ITC.
2. Goods or Services Must Be Received: The purchaser must have actually received the goods or services mentioned in the tax invoice.
3. Return Filing is Mandatory: The GST return (GSTR-3B) must be accurately filed for the relevant period in which ITC is being claimed.
4. Supplier Should Have Paid the Tax: The supplier from whom the goods or services are procured must have paid the GST to the government.
5. Invoice Payment Within 180 Days: Full payment for the invoice, including the GST portion, must be made within 180 days. Delayed payments can lead to reversal of ITC.
6.  Installment-Based Deliveries: When goods are delivered in multiple lots, ITC can only be claimed once the final lot is received.
7. Used for Business Activities Only: The input goods or services must be used for taxable business operations. ITC cannot be claimed on purchases meant for personal use or exempt supplies.
8.  No ITC on Depreciated Tax Amount: If depreciation is claimed on the GST component of a capital asset under the Income Tax Act, then ITC cannot be availed on that portion.
9. Time Limit for Claiming ITC: ITC must be claimed by the earlier of the following:
   1. 30th November of the next financial year
   2. Date of filing the annual GST return (GSTR-9)
10. ITC Must Match GSTR-2B Records: As per GST rules, the amount of ITC claimed in GSTR-3B should be reflected in the auto-generated GSTR-2B report.
11. Not Opting for Composition Scheme: Businesses registered under the composition scheme are not eligible to claim ITC.

What Can Be Claimed as Input Tax Credit (ITC)?

Input Tax Credit can be claimed only on goods and services that are used for business purposes. These must contribute directly to making taxable supplies. Any input that is not related to business or is specifically restricted under GST law will not qualify for ITC.

ITC is allowed when:

1. The goods or services are used for running or managing the business

1. The inputs are directly tied to taxable sales or outputs

1. The expense contributes to business growth, operations, or supply chain

ITC is not allowed when the inputs are used for:

1. Personal use or non-business consumption

1. Supplying exempt goods or services that are not subject to GST

1. Items and services listed under Section 17(5) of the CGST Act

Some blocked items under Section 17(5) include:

1. Motor vehicles used for personal transport

1. Beauty treatments, health services, and outdoor catering

1. Club or fitness center memberships

1. Works contract services related to the construction of immovable property (unless used for further supply of such services)

Only expenses that are clearly linked to business activities and taxable supplies can be considered for ITC. Keeping proper documentation and separating personal and exempt-related expenses from business ones is important to avoid disallowed claims.

Income Tax Credit on Capital Goods

Input tax credit is available for manufacturers and traders on capital goods. The overall tax credit can be spread over a maximum of 36 EMIs. This limit of monthly instalments may be reduced if the concerned state so desires.

For instance, in Maharashtra the overall input tax credit is given only in the month of purchase. In case the capital asset has been sold within 36 months, a proportional amount of input tax credit will be withdrawn. A negative list of capital goods also exists that lists items not eligible for input tax credit.

Input Tax Credit under VAT

The value added tax (VAT) is charged on the value addition to goods, with the VAT liability being calculated on by reducing the input tax credit from the output sales tax during the payment duration. This can be explained with an input tax credit example:

1. Input purchased in the period: Rs.1 lakh
2. Total sales in the month: Rs.2 lakhs
3. Input tax paid: Rs.4,000
4. Output tax payable: Rs.25,000
5. Overall VAT to be paid: (output tax paid - input tax paid) = (Rs.25,000 - Rs.4,000) = Rs.21,000

Therefore, the overall tax payable can be directly calculated as the difference between the overall tax liability and the input tax credit.

Service Tax and Its Impact on Income Tax Credit

This is called as CENVAT credit, wherein the service taxes paid by a different service provider can be claimed as tax credit. To explain this simply, every service provider is in fact a service consumer himself.

A typical service provider will have at least one telephone in his office, for which he is paying service taxes on bills. Now, this tax paid becomes a part of the overall input cost for the service provider, which will then increase the prices of the service they are offering.

This will give rise to a cascading effect which will ultimately hit the final consumer with higher prices. To avoid such a scenario, the CENVAT credit is offered by the government to service provider, which is a type of input tax credit, broadly speaking.

Steps to Claim Income Tax Credit under GST

Registered individuals can claim input tax credit under GST if the meet the below-mentioned conditions:

1. Supplier must be Paid On-Time: The supplier must be paid by 180 days from the date of the invoice. In case the payment is not made, interest will be levied.
2. Lot-Based: Claiming credit is allowed only when the entire lots are received.
3. Furnishing Returns: Relevant returns must be furnished to claim the credit.
4. Tax Payment: Supplier must pay the tax amount.
5. Tax Invoice: The tax invoice is required and must be valid.

Eligible and Ineligible Income Tax Credit Claims

To avail input tax credit benefits, the goods purchased should be for one of the below mentioned purposes:

1. Sale or resale within the state.
2. Interstate trade or commerce sales.
3. Used as raw materials, consumable stores or containers or packing materials to be sold anywhere inside the country or abroad.
4. Used in the execution of works contract.
5. Used as capital goods while manufacturing or reselling the taxable good.
6. Used for making 0-rates sales.

The following circumstances are ineligible for claiming input tax credits:

1. Goods bought from unregistered dealers.
2. Goods bought from registered dealers who have chosen Composition Scheme.
3. Goods notified in the negative list by respective state governments.
4. Goods purchased without Invoice.
5. Goods purchased with Invoice but without a separate mention of amount of tax.
6. Goods purchased for manufacturing exempted goods other than exports.
7. Goods that are in stock which have been taxed previously in an Act though they are categorized as exempted goods under VAT Act.
8. Goods purchased for personal consumption or received for free as gift.
9. Goods purchased from abroad.
10. Interstate goods purchases.
11. Goods including motor vehicles, furniture, toilet articles etc. that aren't related to production of goods or stocked for the purpose of sale/resale.

How to Claim Input Tax Credit (ITC)?

Claiming Input Tax Credit (ITC) requires a systematic approach, including reconciling purchase data and GST return forms.

Steps to Claim ITC:

1. Reconciliation: Start by ensuring the details in your Invoice Management System align with the GSTR-2B and your purchase register. This ensures accuracy and helps avoid discrepancies.
2. Filing GSTR-3B: Every regular taxpayer must report the eligible ITC in Table 4 of Form GSTR-3B for the relevant tax period. Table 4 includes:
   1. Total eligible ITC
   2.  Ineligible ITC
   3. ITC that has been reversed
   4.  ITC that has been reclaimed from previous periods
3. Auto-population in GSTR-3B: Since July 2022, Table 4(A)(5) auto-populates the total ITC figure from the GSTR-2B, including ineligible or unavailable ITC. It's essential to review this figure thoroughly.
4. Bifurcation of ITC: To avoid errors, make sure that ineligible ITC is properly identified and reversed in Table 4(B). If you’re reclaiming ITC from previous tax periods, ensure it's reported to get the accurate net eligible ITC.
5. Importance of Accurate Reporting: Reporting the correct values in Table 4 is vital, as it directly impacts your net tax liability and GST dues. Incorrect or incomplete reporting may lead to discrepancies with GSTR-2B, causing penalties and notices from the government.

New Government Initiatives: The government has started correlating data from GSTR-3B and GSTR-2B instantly upon filing, and these figures will also be cross-checked with GSTR-9 during audits. Automated scrutiny and real-time intimations (via DRC-01C) have been introduced to ensure greater compliance.

Reversal of Input Tax Credit (ITC)

Input Tax Credit (ITC) is available only for business-related goods and services. If these are used for personal or non-business purposes, or for making exempt supplies, ITC cannot be claimed. Additionally, there are specific situations where ITC must be reversed.

Situations where ITC will be reversed:

1. Non-payment of Invoices within 180 Days: If the invoice for the purchase is not paid within 180 days from the issue date, the ITC claimed on that purchase will be reversed.

1. Credit Notes Issued to Input Service Distributor (ISD): If a credit note is issued by the seller to the ISD (Input Service Distributor) or Head Office (HO), the ITC previously claimed will be reversed accordingly.

1. Partial Use for Business and Non-Business Purposes: When inputs are used partly for business and partly for non-business (personal) purposes, the ITC claimed on the portion used for personal use must be reversed in proportion.

1. Capital Goods Used for Business and Non-Business Purposes: If capital goods are used both for business and personal purposes (or exempt supplies), the ITC must be reversed based on the portion used for non-business purposes.

1. Incorrect ITC Reversal: If the total ITC on exempted/non-business inputs is higher than the amount reversed, the difference must be added to the output liability after filing the annual return. Interest will be applicable on this excess amount.

Reporting Reversed ITC: The details regarding ITC reversal should be reported in GSTR-3B. Businesses must ensure the correct calculation and segregation of ITC related to business and non-business use to avoid discrepancies.

Documents Required to Claim Income Tax Credit

To successfully claim Input Tax Credit under GST, a registered taxpayer must maintain and present valid documentation as proof of eligible input. These records serve as the basis for claiming the credit and must comply with GST invoicing rules.

Accepted documents for ITC claims include:

1. A tax invoice issued by the registered supplier for goods or services
2. A debit note issued by the supplier if there is a revision in the taxable value or tax charged
3.  A bill of entry, which is mandatory for claiming ITC on imports
4. An invoice issued under special provisions, such as when reverse charge applies or when the invoice value is below Rs. 200 and a bill of supply is issued instead of a tax invoice
5.  An invoice or credit note issued by an Input Service Distributor (ISD), following GST invoicing guidelines
6. A bill of supply issued by suppliers providing exempt goods or services or by composition scheme dealers

Income Tax Credit Reconciliation Process

ITC reconciliation is crucial for businesses to ensure that they are claiming the correct Input Tax Credits (ITC). Proper reconciliation helps reduce the risk of penalties, legal issues, or even the cancellation of GST registration.

Steps for ITC Reconciliation:

1. Step 1: Download GSTR-2B Data: Start by downloading the GSTR-2B data from the government portal. This data provides a summary of the ITC available to you. 

1. Step 2: Match with Draft GSTR-3B: Compare the GSTR-2B data with the details prepared in the draft GSTR-3B to identify discrepancies.

1. Step 3: Supplier Data Validation: The ITC claimed in GSTR-3B must match the details uploaded by the supplier in their GSTR-1. These details will appear in the Invoice Management System (IMS), and once accepted, will flow into GSTR-2B.

1. Step 4: Automatic Acceptance: Once a supplier saves a document in GSTR-1/IFF/1A, it flows into the IMS of the recipient, and once filed, it populates the recipient’s GSTR-2B. If no action is taken, the invoice is automatically accepted and added to GSTR-2B.

1. Step 5: Reconciliation of GSTR-2B and Purchase Register: It is vital to run a regular reconciliation of the GSTR-2B data against the purchase register to ensure there are no discrepancies.

Why Accurate Reconciliation is Critical: Not reconciling your ITC can expose your business to the risk of over-claimed ITC and increase the likelihood of receiving notices from tax authorities. In case of mismatches between GSTR-3B, purchase register, and GSTR-2B, discrepancies will be communicated to both the supplier and the recipient once GSTR-3B is filed. It’s essential to follow the proper procedure to address any mismatches and apply for re-claiming ITC where necessary.