Overview on Input Tax Credit, claim & Utilisation

GST Input Tax Credit:

What is Input Tax Credit:

The meaning of ITC can be easily understood when we take the words ‘input’ and ‘tax credit’. Inputs are materials or services that a manufacturer purchase in order to manufacture his product or services which is his output. Tax credit means the tax a producer was able to reduce while paying his tax on output.

Input tax credit means that when a manufacturer pays the tax on his output, he can deduct the tax he previously paid on the input he purchased. Here, while paying the tax on his output, he can deduct or take credit for the tax he paid while purchasing inputs.

Kind of GST Taxes

Now a days under the GST law There are three kind of GST taxes in India

1. Centre GST – CGST
2. Integrated GST – IGST
3. State GST – SGST

Example: An example will make things much clear. Suppose that a readymade garment firm buys polyester (input) from a supplier (of input) at Rs 100 and a CGST of Rs 10 is also has to be paid (CGST rate of 10%). The price of polyester input will be Rs 110.

Now the garment manufacturer sells the product at Rs 200 plus tax (means his value addition is Rs 100). Imagine that the GST rate of readymade shirt is 12%. Here, the manufacturer must pay a tax of Rs 24. But he has previously paid a tax of Rs 10 while purchasing the input of polyester. Hence, he can claim this Rs 10 and has to pay only the remaining Rs 14 (of the total Rs 24). The Rs 10 that the manufacturer claimed is the input tax credit.

How to calculate Input Tax Credit:

Suppose you have a business. The service or product you sell attracts a tax of 18%. You use input services or goods during your business. The tax due from you (of 18%) can be adjusted to the taxes paid already by you on the purchase of such inputs. The manufacturers add taxes only for the value addition done and not on the total product value.

A steel utensils manufacturer who manufactures utensils like spoons, plates, etc. Assume that the manufacturer had bought an INR 500 worth of raw steel to make a pressure cooker and INR 100 worth other raw materials. Let’s assume that the GST for steel is 18%. Also, assume that the GST he paid is 28% of other raw materials.

Hence, the manufacturer has paid Rs. 28 on other raw materials and Rs. 90 on raw steel which he used as inputs.

Consider how to calculate Input Tax Credit:

So, the total input tax paid was INR 118 by the manufacturer.

Now, after considering the cost of manufacturing steel pressure cooker using the raw materials and including a decent profit, he decided to sell the pressure cooker to a distributor at INR 800 + GST.

Assume that the steel utensil attracts a GST of 18%.

Now the tax on it will be INR 144. So the manufacturer will invoice the pressure cooker for INR 944.

Hence, the manufacturer is collecting INR 144 as GST on sale from the distributor. The manufacturer had paid INR 118 towards GST during the purchase of his input raw materials. Hence, out of INR 144 of GST, the manufacturer can now claim a credit of INR 118 which he already paid towards GST for inputs and deposit the difference of INR 26 with the government.

This tax credit is available at all succeeding stages, retailers and distributors charge GST and can claim the Input Tax Credit.

How to claim Input Tax Credit (ITC):

The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:

1. One must be a registered taxable person.
2. One can claim Input Tax Credit only if the goods and services received is used for business purposes.
3. Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
4. For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
5. One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
6. Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
7. If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
8. The Input Tax should be paid through Electronic Credit/Cash ledger.
9. All GST returns such as GST-1, 2,3, 6, and 7 need to be filed.

How Input Tax Works Under GST:

Suppose Mr. A is a seller. He sells goods to Mr. B. The buyer Mr. B is now eligible to claim the purchase credit using his purchase invoices.

This is how it works:

1. Uploads all his tax invoices details as issued in GSTR-1.
2. The details uploaded by Mr. A is automatically populated or reflected in GSTR-2A.
3. The details of the sale are then accepted and acknowledged for by Mr. B, and subsequently, the purchase tax is credited to Mr. B’s ‘Electronic Credit ‘ He can use this to adjust it later for future output tax liability and receive a refund.

How to utilize the Input tax credit?

In GST we have three types of taxes CGST, IGST, and SGST/UTGST.
For the inter-state supply of goods/ services, IGST is charged.
And for the intra-state supply of goods/services CGST and SGST/UTGST are charged.

While making payment for the above taxes, the input tax credit will be allowed in the following manner-

Credit	1st to be utilized for payment of	Balance if any
CGST	CGST	IGST
IGST	IGST	CGST and then SGST /UTGST
SGST/UTGST	SGST/UTGST	IGST

The documents and forms required to claim Input Tax Credit:

Each applicant will require the following documents to claim Input Tax Credit under GST:

1. Supplier issued an invoice for supplying the services and goods or both according to GST law.
2. A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
3. Bill of entry.
4. A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules.
5. An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applied according to the GST law.
6. A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.

The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request.

For taxes paid on goods and services or both due to any fraud or due to order for the demand raised, suppression of facts, or wilful misstatement, Input Tax Credit cannot be claimed.

Since input credit will be available to the seller at each stage, the input tax credit is expected to bring down the overall taxes charged on the product at present. So, if the input credit mechanism works efficiently, final consumers may see the cost reduction.

No Input Tax Credit on canteen services & business promotion expenses incurred

• The Honorable AAR Haryana in M/s. Pvt Musashi Auto Parts. Ltd. held that the ITC is not available for canteen services provided by the employer to its employees and for business promotion expenses. It also held that the distribution of food coupons among employees for part-time consideration will indeed attract tax liability and that the coupon value would form part of the total taxable value of the service provider, i.e. the caterer.{ Advance Rule No. HAR/HAAR/R/2019-20/18 of 4 February 2020}

Good & Services Tax will be levied on the recovery of canteen services provided on regardless “profit-making” aspect.

• In the case of M/s Amneal Pharmaceuticals Private Limited, GST would be levied on the recovery of canteen services regardless of the “profit-making” aspect of The Hon’ble Gujarat AAR. held that Goods & Services Tax would be levied on the recovery of the employee’s amount on behalf of the third party canteen services offered by the company to its employees, which would be obligatory under the Factories Act 1948 as it contributes to a supply pursuant to u/s 7(1))(a) of the CGST Act even if there is no profit-making. [Advance Rule No. GUJ/GAAR/R/50/2020, dated 30 July 2020]

No advance ruling on the eligibility of Input Tax Credit w.r.t promotional schemes on the basis of the diverging opinion of the Member

• The Honourable AAAR, Maharashtra in M/s. Sanofi India Ltd. held that pursuant to Section 101(3) of the CGST Act, 2017, No advance ruling may be issued on the eligibility of an Input Tax Credit for goods and services offered under various promotional schemes and as a reminder of the brand since one member (SGST) has complied with Author’s order. {Order No. MAH/AAAR/SS-RJ/10/2019-20 of 22 October 2019}

GST input on construction Sector

• Input tax credit under the GST  shall not be available for any work contract services. Input tax credit under the GST  for the construction of an immovable property cannot be availed, except where the ITC Service is used for further work contract services.

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