Input Tax Credit – ITC under GST Regime

  • August 8, 2019
  • CA Chandan Agarwal's Office
CA Chandan Agarwal
CA Chandan Agarwal

Section 16 of the CGST Act, 2017 laid down the eligibility and conditions for taking the input tax credit, accordingly every registered person is entitled to take input tax credit under GST Law on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.  The input tax credit under GST is credited to his electronic credit ledger which he can utilize and adjust against while discharging his outward tax liability.

When you purchase any raw materials as inputs to manufacture and sell your commodity, you end up paying tax on such input material. The tax you paid on the purchase of such input material is called Input Tax. At the time of supply of the finished goods, you are required to pay corresponding tax in respect of the finished good or output. However, to pay tax on such finished goods you can avail the deduction of the tax that you have already paid on input materials (used in the manufacturing of finished goods) and just pay the balance as the net tax liability.

At every stage of the supply chain, the buyer of the goods or service gets credit for the input tax paid, and he can use it to offset the GST payable on the output which is required to be paid to the Centre and State governments. To understand this Input Tax Credit concept better, let’s take the help of an illustration of a company called XYZ Ltd which sells custom-made tyres. For example, XYZ purchases rubber worth INR 40,000 from ABC Ltd. at a GST rate of 12.5%. Thus, the input tax paid by XYZ Ltd is INR 5,000. XYZ sells the manufactured tyres for INR 80,000 at a GST rate of 12.5%, making the total selling price INR 90,000 (INR 80,000 + INR 10,000). Thus, the tax that XYZ ltd owes to the government = Output tax – Input tax credit = INR 10,000 – INR 5000 = INR 5,000

Who can claim Input Tax Credit?

Input Tax Credit can be claimed by a person who is registered under GST and fulfills the prescribed conditions:

  • The input goods or services have been received by the registered person.
  • The registered person should be in possession of a tax invoice.
  • The registered person has filed the GST returns.
  • The GST charged has been deposited to the credit of government by the registered person.
  • In the case where goods are received in installments/lots of Input Tax Credit can be claimed only when the last installment/lot is received by the registered person.

Note: No Input Tax Credit will be available if depreciation has been claimed on capital goods.

Conditions to avail Input tax credit under GST

1. The registered person should be in possession of a tax invoice or debit note as issued by the registered supplier, or any other taxpaying documents as may be prescribed

2. Receipt of goods or services or both (See Note: 1)

3. The tax has been paid to the Government related to such input tax credit either in cash or through the utilization of input tax credit.

4. Furnishing required to return as per section 39.

Note: When the supplier delivers goods to a recipient or any other person on the direction of the purchaser, as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the purchaser received the goods.

Important Points related input tax credit under GST

1. When the goods are received in lots or installments against an invoice, the registered person can take the input tax credit on receipt of last lot or installments.

2. The recipient should make payment for the value of goods or services or both along with tax to the supplier within 180 days from the date of invoice else the availed input tax credit shall be added to output tax liability along with applicable interest, except for the supplies on which reverse charge mechanism applies.

3. The recipient can take input tax credit after making payment to the supplier for the value of goods or services or both along with tax.

Documents for availing Input tax credit under GST

As per rule 36 of CGST Rules, the following documents are accepted to avail input tax credit:

1. An invoice issued by the supplier as per the provisions of section 31 of the CGST Act

2. An invoice issued as per the provisions of clause (f) of sub-section (3) of section 31 of CGST Act, subject to payment of tax

3. A debit note issued as per the provisions of section 34

4. A bill of entry or similar document prescribed under the Customs Act, 1962

5. Bill of supply issued by the supplier

6. An Input service distributor invoice or credit note or any document issued by an Input service distributor as per the provisions of sub-rule (1) of rule 54

Reconciliation of Input Tax Credit: The 3 GST credits can be used to offset one another.

Old Rule
Payment for First set off Then set off
SGST SGST IGST
CGST CGST IGST
IGST IGST CGST and SGST
New rule effective from 1st February 2019
Payment for First set off to Then set off to
SGST IGST SGST
CGST IGST CGST
IGST IGST CGST and SGST

Note: SGST credit cannot be used to set off CGST and vice versa.

Source: https://taxguru.in/goods-and-service-tax/input-tax-credit-itc.html

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