Input Tax Credit under GST

Input tax credit is the process of reducing the tax you already paid on inputs at the time of paying tax on output. The balance between the two is paid to the government.

Suppose you buy a product from a registered dealer and paid tax on purchases. At the time of selling, you collect the tax and adjust the tax you paid at the time of purchase with the tax you collected on sales. It means you availed the input tax credit. The remaining balance will be submitted to the government.

For ex – Suppose that you are a manufacturer and you paid Rs.450 on output (Final product) whereas you paid input tax of Rs.100, Rs.120 & Rs.80 on purchases respectively. You can avail input tax credit of Rs.300 (Rs.100 + Rs.120 + Rs.80) and Rs.150 (Rs.450 - Rs.300) will be deposited as tax to the government.

Input Tax Credit

Who can claim Input Tax Credit?

Input tax credit can be claimed by only those persons who are registered under GST and fulfills the following conditions –

  1. The said goods & services has been received
  2. Returns are already been filed
  3. Supplier has already paid the chargeable tax to the government.
  4. The dealer should possess tax invoice
  5. If you are receiving goods in installments, you can claim input tax credit only when the last lot of goods is received.
  6. In case if you are claiming depreciation on tax components of capital goods, you are not eligible to avail input tax credit.
A person cannot claim input tax credit, if the individual is registered under GST composition scheme.

What can be claimed as Input Tax Credit?

Input tax credit can only be claimed on goods & services for business purposes. Input tax credit will not be available for goods & services specifically used for –

  1. Personal use
  2. Exempt supplies
  3. Supplies for which input tax credit is specifically not available.

Documents required for claiming Input Tax Credit

The documents required for claiming input tax credit are as follows –

  1. Invoice issued by the supplier of goods/services
  2. Debit note issued by the supplier
  3. Bill of entry
  4. Any invoice or credit note issued by the input service distributor (ISD)
  5. Supply bill issued by the supplier of goods or services or both.
  6. Any invoice issued under special circumstances. For ex – Supply bill issued instead of tax invoice (If the amount is less than Rs.200) or reverse charge is applicable.
All these documents mentioned above should be furnished at the time of filing GSTR-2 form.

Reversal of Input Tax Credit

There are certain situations where input tax credit will be reversed. They are as follows –

Case 1 – Invoices not paid till 180 days - Input tax credit will be reversed for invoices which are issued but not paid till 180 days.

Case2 – Credit note issued by seller to input service distributor - This is applicable on input service distributor. If a credit note is issued by the seller to the Head office, the subsequently reduced input tax credit will be reversed.

Case 3 – Inputs partly for business purpose and partly for exempted supplies or for personal use - This is applicable on those businesses which use input tax for both business and non-business purpose. Input tax credit used for personal purpose must be reversed proportionately.

Case 4 – Capital goods partly for business & partly for exempted supplies for personal use - It is similar to the point mentioned above. The only difference is that it is related to capital goods.

Case 5 – ITC reversed is less than required – It is calculated after submission of annual returns. If total input tax credit on exempted/non-business purpose goods is more than the actual reversed input tax credit during the year, the difference amount will be added to output liability. Interest is also applicable.

Input Tax Credit Reconciliation

Input tax credit claimed must match with the details mentioned by the supplier at the time of GST return. In case, if any mismatch found between the two, the supplier and the recipient should communicate with each other in order to solve the discrepancy. In such cases, both need to follow a procedure to reclaim input tax credit.

How to avail Input Tax Credit?

The process of availing input credit is given below in a tabular format –

To pay IGST Take input tax credit from IGST, CGST & SGST paid on purchases
To pay CGST Take input tax credit from CGST & IGST paid on purchases
To pay SGST Take input tax credit from SGST & IGST paid on purchases

Special Cases of Input Tax Credit (ITC)

Input Tax Credit for Capital Goods

Input tax credit is not available for –

  • Capital goods used specifically for non-business purposes.
  • Capital goods used specifically for making exempt supplies.

Input Tax Credit on Job work

A principal manufacturer can avail input tax credit by sending goods for further processing to a job worker. For ex – A shoe manufacturing company send half made shoes to a job worker to repair its sole. In such case, Principal manufacturer can avail input tax credit in lieu of the goods purchased and sent to the job worker.

Input tax credit can be availed when goods are sent to job worker in the following cases –

  • When goods are sent from principal place of business.
  • When goods are sent directly from the place of supply.
However, kindly make sure that in order to avail input tax credit, the sent goods must be received back by the principal within one year. In case of capital goods, it is 3 years.

Input Tax Credit provided by input service distributor

An input service distributor can be a branch office or registered office or a head office (most of the time) under GST. Input service distributor collects all the input tax credit on purchases & distributes it under different heads like CGST, SGST, and IGST.

Input Tax Credit on transfer of business

This is applicable in cases of merger/transfer/amalgamation of business. At the time of business transfer, the transferor passed the available input tax credit to the transferee.

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