Input Tax Credit (ITC) under GST

The core of GST’s importance lies in how it facilitates the seamless transfer of input credit across the entire supply chain, from the production of goods to their ultimate sale to consumers, regardless of state boundaries. This smooth flow of credit is enabled by the Input Tax Credit ITC system, a fundamental feature of GST.

In this article, we’ll break down what Input Tax Credit means, how you can claim it, and offer insights into reconciliation and the Reverse Charge Mechanism

What Is Input Tax Credit? 

Input Tax Credit ITC is a key part of GST. It helps busine­sses by allowing them to subtract the tax paid on ite­ms bought from the tax due on sales. In e­asy terms, if a business has paid GST on things like mate­rials and services, they can ge­t it back. This reduces their total tax. ITC under GST ensures that taxes aren’t stacked up at each stage of production, promoting a smoother and fairer tax system for businesses.

Who Can Claim Input Tax Credit?

To qualify for claiming ITC under GST, a registered entity must fulfill the following conditions:

• Have a valid tax invoice for the purchases made.
• Confirm receipt of the goods and services for which the credit is sought.
• Ensure regular filing of returns as mandated by GST regulations.
• Pay the tax charged by the supplier to the government.
• Input Tax Credit can only be claimed upon receiving the final lot for goods received in instalments.
• Input Tax Credit won’t be allowed if depreciation is claimed on the tax component of the capital goods.

What Can Be Claimed As Input Tax Credit?

Input Tax Credit is strictly claimable for business purposes, encompassing purchases directly related to commercial activities. Nevertheless, it cannot be applied to services or goods exclusively designated for exempt supplies, personal consumption, or transactions explicitly ineligible for ITC according to GST regulations.

Steps For Claiming Input Tax Credit

Here are the comprehensive steps you need to follow to effectively claim Input Tax Credit for your business:

• Fill out your monthly GST returns using Form GSTR-3B.
• Disclose the input tax credit amount accurately in Table 4 of the form.
• Consider claiming a provisional Input Tax Credit (ITC), which is 20% of the eligible ITC reported by your suppliers in their GSTR-2A return.
• Before filing GSTR-3B, verify the figures in your GSTR-2A to ensure accuracy.
• Note that since October 9, 2019, changes have been made in claiming provisional ITC.
• Now, you can only claim the eligible ITC, which constitutes 20% of the amount available in GSTR-2A, as a provisional ITC.
• In your GSTR-3B, the reported ITC includes the actual input tax credit from GSTR-2A along with the provisional ITC amounting to 20% of the eligible ITC in GSTR-2A.
• Streamline the process by diligently reconciling your expense ledger or purchase register with the information provided in GSTR-2A.

Can Income Tax Credit Get Reversed? 

While Input Tax Credit ITC is typically claimed for business-related expenses, there are instances where it might need to be reversed. Here are some situations where this could occur:

• Unpaid Invoices Beyond 180 Days 

If invoices remain unpaid for more than 180 days, the ITC claimed against them may need to be reversed.

• Issuance of Credit Notes by Sellers

When sellers issue credit notes, particularly to Input Service Distributors (ISD), any corresponding ITC under GST might also be reversed.

• Dual Usage of Inputs

If inputs are used for both business and personal or exempted purposes, the ITC claimed needs to be adjusted proportionately.

• Dual Usage of Capital Goods

Similarly, if capital goods are utilized for both business and personal or exempted purposes, the GST ITC claimed must be adjusted accordingly.

• Insufficient reversal of ITC

When filing annual returns, if the reversed ITC under GST falls short of what’s required, the difference must be accounted for, with interest charges possibly applicable.

What Does Income Tax Credit Reconciliation Mean?

Income Tax Credit reconciliation ensures that the Input Tax Credit ITC claimed by a taxpayer aligns with the information provided by their suppliers in their GST returns. This process verifies accuracy and consistency in tax reporting. If any disparities arise between the ITC claimed and the supplier’s reported information, both parties are notified after the submission of the GSTR-3B.

What Are The Documents Required For Claiming Input Tax Credit? 

To successfully claim ITC under GST, there is a specific set of documents that you’ll need to gather and maintain diligently:

• Invoices issued, like a Supply bill or invoices from the supplier.
• Bill of Entry or equivalent documentation.
• Documents provided by Input Service Distributors (ISD), such as invoices or credit notes.
• Debit notes issued by the supplier.
• Bill of Supply from the supplier.

What Is The Time Limit For Claiming Income Tax Credit? 

Several factors, such as the kind of document and particular dates for filing GST returns, affect the time limit for claiming Input Tax Credit. In general, September of the next fiscal year is when GST returns must be submitted. The date on which the annual return for that fiscal year was due is also taken into consideration.

What Is Reverse Charge Mechanism Under Income Tax Credit? 

Reverse Charge Mechanism (RCM) shifts the responsibility of paying tax from the seller to the buyer. This means the buyer has to pay the tax instead of the seller, especially when buying from an unregistered seller. For instance, if a registered business buys something worth 10,000 rupees from an unregistered seller, they must pay 1,800 rupees in tax (assuming an 18% rate) and can later claim this amount back.

Additionally, RCM applies in other scenarios, such as transactions with dealers under the GST composition scheme or with registered individuals. Here, the recipient bears the GST liability and may not claim ITC. RCM ensures tax collection from all transactions, even those involving unregistered or small suppliers.

Income Tax Credit Special Cases

Income Tax Credit Special Cases 

Let’s now take a closer look at some of the unique and important special cases regarding Income Tax Credit:

• Income Tax Credit for Capital Goods

Under GST, businesses can claim Income Tax Credit (ITC) for capital goods, with some restrictions. However, Income Tax Credit cannot be claimed for capital goods used exclusively for producing exempted products or for non-business purposes.

• Income Tax Credit on Transfer of Business

During mergers, amalgamations, or business transfers, the transferor can claim Income Tax Credit (ITC), which will then be transferred to the transferee. This ensures continuity of Income Tax Credit benefits for the business undergoing the transfer process.

• Income Tax Credit on Job Work

When manufacturers send goods to job workers for further processing instead of completing the entire production process themselves, they can still claim Income Tax Credit for the tax paid on the purchased goods. Whether goods are sent directly from the main manufacturing facility or from the supplier’s point of supply, they remain eligible for Income Tax Credit.

• Income Tax Credit Provided by Input Service Distributor (ISD)

In the GST system, an Input Service Distributor (ISD) plays a crucial role in distributing Income Tax Credit to recipients across different tax categories such as SGST/UTGST, CGST, IGST, and cess, for all purchases made by the registered person. The ISD can be the registered person’s head office, branch office, or registered office.

Conclusion 

In conclusion, understanding the Income Tax Credit ITC is crucial for businesses navigating the GST system. From the seamless credit flow facilitated by ITC to special cases like capital goods and job work, grasping these concepts is essential for maximizing tax benefits. By staying informed and compliant with regulations, businesses can effectively manage their taxes and contribute to their financial success.

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