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Input Tax Credit

What is Input Tax Credit?

To understand input tax credit, we can break the term into two - input and tax credit. Inputs refers to the materials that a manufacturer uses for the production of products. Tax credit is the amount of tax a producer has been able to reduce at the time of paying tax on output. Now, together, input tax credit means the credit that a manufacturer receives for payment of input taxes towards the inputs which are used in the manufacture of products. This means that when a manufacturer pays the tax on the output, the entity can deduct or take credit for the tax paid while buying the inputs.

Input Tax Credit on Capital Goods

According to Section 2(19) of The Central Goods and Services Tax Act, 2017, capital goods are referred to “goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.”

ITC can be claimed for business reasons only. It is not available for personal expenses. To become eligible for claiming input tax credit on capital goods, the entity has to make sure that the transaction is reflected in the GST return filing. Rule 8 of Input Tax Credit Rules sheds light on input tax credit in case of capital goods. The rule, which reads - Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases - says that the amount of input tax shall not be credited to the entity's electronic credit ledger should capital goods be used exclusively for "non-business purposes" or used exclusively for "effecting exempt supplies". It additionally states that the amount of input tax concerning capital goods used exclusively for effecting supplies besides exempted supplies but inclusive of zero-rated supplies shall be credited to the electronic credit ledger. The amount of input tax not covered under the above-mentioned points shall be credited to the electronic credit ledger and the useful life of the goods will be taken as 5 years from the invoice date. There are however, conditions associated with this.

Time limit to Avail GST Input Tax Credit

Registered taxable persons can avail ITC in a specific manner and within a specified timeframe. The below table shows the various circumstances where ITC can be claimed:

CircumstancesITC claims for goods (held on previous day)
An individual has taken voluntary registrationOn the day of registration
A taxable registered person who has stopped payment of taxes towards composition levy schemeFrom the day the individual is liable to normally pay tax under Section 7
An individual who is granted registration or liable to register or has applied for registration From the day that the individual is liable to be taxed

Input tax credit for the situations mentioned above can only be claimed if it does not surpass a year from the tax invoice date of issue (related to supply). In other cases, an entity needs to claim input tax credit earlier of the following:

  • Monthly return - GSTR-3 - filing due date for the following financial year’s month of September or
  • Providing annual return

Conditions Associated with Claiming Input Tax Credit

A businessperson who wishes to claim input tax credit has to ensure that the following conditions are met:

  • The supplier should have uploaded the invoice onto the GSTN
  • The supplier must have paid GST to the government
  • The invoice should be GST compliant
  • Returns have to be filed Other important points to note while claiming input tax credit
  • Input tax credit will not be allowed if depreciation has been claimed on the tax component of a capital good.
  • Should the goods be received at instalments, ITC can only be claimed when the last lot is received.
  • In case the supplier fails to supply of goods in a matter of 180 days from the date of invoice, the ITC which is already claimed by recipient shall get added to output tax liability and interest to be incurred on such tax involved. Once the payment is made to the supplier, ITC can be once again claimed.

Ways to Claim Input Tax Credit via Different Routes

The following are the different ways an entity can claim input tax credit:

  • When payments made to IGST - In this case, take input tax credit from IGST, SGST and CGST that is incurred on the purchases.
  • When payments made to CGST - In this case, take input tax credit from IGST and CGST that is incurred on the purchases.
  • When payments made to SGST - In this case, take input tax credit from IGST and SGST that is incurred on the purchases.

Instances where Input Tax Credit is Ineligible under GST

Below are a few cases where input tax credit cannot be availed:

  • Motor vehicles & conveyances

Exceptions - Transporting passengers, transporting goods, supply of other vehicles and imparting training like driving such vehicle

  • Foods, Beauty Treatment, Health Services Cosmetic, Outdoor Catering and Plastic Surgery

  • Membership of a Club

  • Membership of a Health Centre

  • Membership of a Fitness Centre

  • Rent-a-cab, Life Insurance, Health Insurance

Exceptions - Services made mandatory for an employer to provide its employee by the government

  • Travel

Exception - Travel for business purposes

  • Works contract

  • Construction of immovable property which includes renovation, reconstruction, additions or repairs

  • Goods and services for personal consumption

  • Destroyed goods and free samples

  • Dealer under composition scheme

Frequently Asked Questions

What is input credit?

Input credit refers to bringing down the tax that has already been paid on inputs while paying tax on output. To understand this better, consider this example - X is a manufacturer. The tax that X pays for the output, which is the final product, is Rs. 500. The tax paid on input is Rs. 350. X can therefore claim input credit of Rs. 350 and only deposit Rs. 150 in taxes.

How do I claim GST input credit?

To claim input credit under GST, an individual should have a tax invoice or debit note, which has been issued by a registered dealer. Also, the entity must have received the goods and/or services. The tax charged on purchases need to be deposited in cash or through claiming input credit. Finally, the supplier must have filed GST returns.

In the case of imports, what is the condition associated with input tax credit?

The input tax credit of IGST AND GST compensation cess can be availed by the entity who is making the import. The ITC of basic customs duty, however, would not be available. To make use of input tax credit of IGST and GST Compensation cess, it is compulsory for the importer to mention the GST registration number on the bill of entry.

What are the documents as per which ITC can be claimed?

The documents needed to claim ITC are as follows:

  • Debit note issued by supplier
  • Input Service Distributor-issued document
  • Invoice issued by supplier of goods
  • Recipient-issued invoice, along with tax payment proof
  • Revised invoice
  • Bill of entry

Who can claim input tax credit?

An entity who has a tax invoice or a debit note that is issued by a registered dealer, can claim input tax credit. Should the taxpayer purchase items from a dealer registered under the composition scheme, he or she cannot claim input tax credit. Additionally, if the entity himself or herself is registered under the composition scheme, he or she will not be able to claim input tax credit.

Can GST be eligible for ITC when motor vehicles are used for office purpose?

Input tax credit can be availed for all the goods that are used for business operations. There are certain cases, however, where the ITC on goods and services has been limited. As per the rules, the ITC is only allowed when the vehicle is acquired for resale or to transport goods or passengers or for imparting training. If the vehicle is used for any other cause, input tax credit will not be permitted.

What are the conditions associated with availing Input Tax Credit?

For the purpose of claiming input tax credit, an entity should make sure the following conditions are met:

  • The supplier needs to have uploaded the invoice onto the GSTN
  • The supplier should have paid GST to the government
  • The invoice has to be GST compliant
  • Returns need to be filed

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