INPUT TAX CREDIT(ITC) ON GOODS AND SERVICES TAX

BRIEF INTRODUCTION

Input Tax Credit refers to the amount of tax, which a taxpayer pays on
the inputs purchased, for providing outward taxable supplies.

Such an amount of ITC can be used to set off as against the outward tax liability, thereby reducing the outward tax to be paid in relation to taxable supplies.

Such a credit for input tax is the essence of GST. ITC helps in eliminating the cascading effect and thus reduces the events of tax on tax.

WORKING OF ITC

When you person buys any good/service from a registered dealer, they need to pay certain amount of taxes on the same.

Now, when the said purchased, goods are further sold, the person collect tax from their customer.

Now, while depositing the amount of tax collected from the customer, the supplier can set off the amount of tax paid at the time of purchase and make the payment of the balance amount of tax.

Since a single tax in the name of GST is levied all across India, the suppliers do not face any problem in claiming the ITC and there would be a seamless flow of credit, throughout the chain of supply.

ELIGIBLE PERSON TO CLAIM ITC

Any person, registered under GST, can claim the amount of ITC, provided all the following conditions are fulfilled –

1. The person shall be in possession of a valid tax invoice or a debit note for the supplies made by them.
2. The person should be in receipt of goods or service.
3. The person should have filed their applicable return, on and before the due date.
4. The tax collected on the supplies made by such person, should have been deposited with the government, within the prescribed time.
5. Where the goods are to be received in instalments, the person can claim ITC, only when the last lot is received.
6. The person shall make the payment of invoice, within 180 days from the issuance of such invoice.
7. No ITC be claimed in respect of a capital good, where depreciation has been claimed on tax component of the said capital good
8. Any person registered under section 10 of CGST Act i.e., as a composite taxpayer, shall not be eligible to claim ITC.

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SUPPLIES ON WHICH ITC CAN BE CLAIMED

It is provided that ITC can be claimed only where the goods or services availed have been made for making further taxable supplies, in the course or furtherance of business.

Thus, ITC shall not be available in respect of supply of goods/services made for personal use, Exempt supplies, and supplies in respect of which ITC is specifically disallowed.

In the pre-GST era, there were different indirect taxes, all over India, and the rates were also different in every state/UT. Thus, the availability of ITC was very difficult, and because of this, there was a cascading effect.

However, after the introduction of GST, all the taxes were subsumed under one tax named GST, and the rates were uniformly charged all over India.

 

CONSTITUTION OF GST

GST involves the following class of taxes –

1. Central Goods and Services Tax (CGST)

CGST is levied in respect of intra-state/UT supply of goods or services or both.

2. State Goods and Services Tax (SGST)

SGST is levied in respect of intra-state supply of goods or services or both.

3. Union Territory Goods and Services Tax (UTGST)

UTGST is levied in respect of intra Union Territory supply of goods or services or both.

4. Integrated Goods & Services Tax (IGST)

IGST is levied in respect of inter-state supply of goods or services or both.

ADJUSTMENT OF ITC UDER DIFFERENT HEADS

1. ITC OF CGST – ITC of CGST shall be used to set off the outward tax liability of CGST and in case any balance is left, the same can be utilised against the liability of IGST, however, the set off is not allowed against the liability of SGST.
2. ITC OF SGST/ UTGST – ITC of SGST/UTGST shall be used to set off the outward tax liability of SGST/UTGST and in case any balance is left, the same can be utilised against the liability of IGST, however, the set off is not allowed against the liability of CGST.
3. ITC OF IGST – ITC of IGST shall be used to set off the outward tax liability of IGST and in case any balance is left, the same can be utilised against the liability of CGST or SGST/UTGST, in any proportion.

SUMMARIZED TABLE FOR SET OFF

ITC IN RESPECT OF	INITIAL UTILIZATION	BALANCE UTILIZATION
CGST	CGST	IGST
SGST/UTGST	SGST/ UTGST	IGST
IGST	IGST	CGST OR SGST/ UTGST, IN ANY PROPORTION.

PROCEDURE FOR CLAIMING ITC

To avail the benefit of input credit, the taxpayer is required to furnish the amount of ITC, in their monthly GST returns which is provided in Form GSTR-3B.

A taxpayer can claim the amount of ITC on a provisional basis, by filing the form GSTR-3B, and the said provisional amount shall be allowed up to 20% of the eligible ITC, as mentioned in the auto-generated GSTR-2A return.

With effect from 9 October 2019, a taxpayer is allowed to claim only 20% of the eligible ITC as provided in GSTR-2A, as provisional ITC.

REVERSAL OF INPUT TAX CREDIT

As discussed earlier, ITC can be claimed only where the goods or services availed have been made for making further taxable supplies, in the course or furtherance of business.

Thus, where ITC is availed in respect of supply of goods/services made for personal use, Exempt supplies, and supplies in respect of which ITC is specifically disallowed, the same be liable for reversal.

ITC shall also be reversed under the following situations –

1. ITC shall be reversed, where the invoices, in respect of which such ITC is claimed, has not paid within 180 days of issue.
2. Where an Input Service Distributor is issued a credit note from their supplier, the ITC shall be reversed.
3. Where any good or service is used partly for the purpose of business and partly for personal use, then the ITC be reversed in respect of the goods/services used specifically for the personal purpose.
4. Where anu capital good is purchased and the same is used for business and personal use simultaneously, the ITC be reversed in proportion to the capital asset used for personal purpose.
5. Also, where the ITC reversed in case of making exempt supplies, is less than the actual amount as stated in the GST return, the said shortfall of amount is required to be reversed, along with the applicable rate of interest.
6. Where, after the reconciliation of ITC, it is believed that the ITC claimed by the taxpayer, is more than the amount specified in their GST return, the said amount of excess ITC claimed shall be reversed.

DOCUMENTS REQUIRED FOR CLAIMING ITC

The taxpayer is required to be in receipt of the following documents, to avail the credit of ITC –

1. The Invoice issued by the supplier in respect of the goods/services or both.
2. Any debit note issued to the recipient.
3. Bill of entry or any document issued by the custom authority, evidencing the inward movement of goods.
4. Any invoice issued in the form of a bill of supply, since the amount of the supply of goods/service or both, does not exceed Rs 200 or the tax is to be paid under the Reverse Charge Mechanism.
5. Any invoice issued by the Input Service Distributor, under the invoice rules of GST Act.
6. Any revised invoice received due to change in value of supply or rate of GST applicable.

ITC IN RESPECT OF IMPORTS

As per the GST Act, a taxpayer is eligible to claim ITC in respect of IGST and GST Compensation Cess paid on the import of goods. However, the same shall not be available in respect of Basic Customs Duty (BCD) paid.

For availing the ITC of IGST and GST Compensation Cess, the importer is required to provide their GST Registration number (GSTIN) in the Bill of Entry.

Once the same is provided, the Customs EDI system will inter-connect with the GST portal and the ITC will be validated.

IMPORTANT POINTS

1. The credit for Input Tax Credit shall be available, where the registered person is in receipt of an invoice, formed as per the particulars prescribed in the Invoice Rules.
2. Where the tax paid on inputs exceeds the tax liability, the balance amount of ITC can either be carried forward or be claimed as refund.
3. The balance liability of tax, after claiming ITC, shall be deposited with the govt in form GSTR 3, latest by the 20^th of the month succeeding the month in which the supply is made.
4. It is provided that the credit of ITC will not be available after the earlier of, September of the respective Financial Year, in which the invoice was issued or the date of filing of Annual Return.
5. Person applying for GST Registration within 30 days of becoming liable, can claim the amount of ITC in respect of goods held, on the day immediately preceding the date of becoming liable for registration.
6. In case a person applies for registration under the composition scheme, they can claim ITC in respect of goods and capital goods held, on the day immediately preceding the date on which he becomes liable for GST registration.
7. In case a person is supplying exempted goods or services or both, and after some time, the supplies become taxable, such a person making can avail the credit of ITC in respect of goods and capital assets held in stock for making exempt supplies.
8. In case of business reconstruction involving sale, merger, demerger or amalgamation, of a registered entity, the amount of unutilised ITC can be transferred by the transferor to the transferee using form ITC-02.
9. Where GST is paid under Reverse Charge Mechanism, the same shall also be eligible to be claimed as Input Tax Credit.
10. ITC can also be claimed on GST paid while purchasing a Capital Goods, provided no depreciation be claimed on the Tax component of the said capital good.

ITC ON JOB WORK

It is commonly seen, that a principal manufacturer supplies goods, in the form of raw material, to their job workers, for further processing and manufacturing of final good.

In such a case, the principal shall claim the ITC in respect of goods supplied to job worker, provided the goods are sent to job worker, either from principal’s place of business, or is directly delivered by the supplier.

However, the ITC will be valid, provide such goods are received back by the principal within the prescribed time period, which is of 3 years in case of capital goods, and 1 year in case of other goods.

ITC BY INPUT SERVICE DISTRIBUTOR (ISD)

ISD can be termed as the head office (mostly) or a branch office or any other office, registered under the same PAN number.

Such ISDs collect the input tax credit on the purchases made on all India PAN basis and will then distribute the same to the respective recipients under different heads of GST like CGST, SGST/UTGST, IGST or Compensation cess.

ALLOWANCE OF ITC IN RESPECT OF CERTAIN SUPPLIES

S. NO.	PARTICULARS	ALLOWED OR DISALLOWED UNDER GST
1.	MOTOR VEHICLES & OTHER CONVEYANCE	ALLOWED, WHEN SUPPLIED IN THE NORMAL COURSE OF BUSINESS OR IS USED FOR THE FOLLOWING TAXABLE SERVICES – A.    TRANSPORTATION OF PASSENGERS. B.     TRANSPORTATION OF GOODS. C.     IMPARTING TRAINING ON MOTOR DRIVING SKILLS
2.	FOOD & BEVERAGES, OUTDOOR CATERING, BEAUTY TREATMENT, HEALTH SERVICES, COSMETIC & PLASTIC SURGERY	ALLOWED, PROVIDED THE SAME IS MADE FOR MAKING FURTHER TAXABLE SUPPLIES OR IS PROVIDED AS A PART OF COMPOSITE SUPPLY.
3.	MEMBERSHIP OF CLUB OR FITNESS CENTRE OR HEALTH CENTRE	NOT ALLOWED
4.	CAB RENTING SERVICE, HEALTH INSURANCE AND LIFE INSURANCE	ALLOWED, PROVIDED – A.    MADE OBLIGATORY BY THE GOVERNMENT, FOR THE EMPLOYERS TO PROVIDE IT TO THEIR EMPLOYEES. B.     THE SAME IS MADE FOR MAKING FURTHER TAXABLE SUPPLIES OR IS PROVIDED AS A PART OF COMPOSITE SUPPLY.
5.	TRAVEL BENEFITS TO EMPLOYEES. EG: LEAVE TRAVEL ALLOWANCE	NOT ALLOWED
6.	WORKS CONTRACT SERVICES, SUPPLIED IN RELATION TO THE CONSTRUCTION OF AN IMMOVABLE PROPERTY	ALLOWED, PROVIDED – 1.      THE SAME IS SUPPLIED FOR THE CONSTRUCTION OF PLANT & MACHINERY. 2.      IT IS SUPPLIED AS INPUT FOR ANOTHER WORKS CONTRACT SERVICE.
7.	GOODS AND/OR SERVICES FOR CONSTRUCTION OF IMMOVABLE PROPERTY, WHETHER TO BE USED FOR PERSONAL OR BUSINESS USE.	NOT AVAILABLE
8.	GOODS/ SERVICES ON WHICH GST HAS BEEN PAID UNDER THE COMPOSITION SCHEME	NOT AVAILABLE
9.	GOODS/ SERVICES RECEIVED BY A NON-RESIDENT TAXABLE PERSON	ALLOWED, PROVIDED THE GOODS/SERVICES ARE IMPORTED BY THE NON-RESIDENT TAXABLE PERSON
10.	GOODS/ SERVICES USED FOR PERSONAL CONSUMPTION	NOT AVAILABLE
11.	GOODS WHICH ARE LOST/ STOLEN/ DESTROYED/ WRITTEN OFF/ DISPOSED OF BY GIFT/ FREE SAMPLE	NOT AVAILABLE
12.	ANY TAX PAID DUE TO A. NON-PAYMENT OF TAX, ORB. SHORT PAYMENT OF TAX, ORC. EXCESSIVE REFUND	NOT AVAILABLE
13.	ITC UTILISED OR AVAILED BY WAY OF A. FRAUD, OR B. WILL-FULL MISSTATEMENTS, ORC. SUPPRESSION OF FACTS	NOT AVAILABLE

NOTE – ITC shall be available in respect of purchases made, provided the same is used to provide further taxable supply of goods/services or both in the course or furtherance of business.

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