Input Tax Credit
Input tax credit pertains to the central tax (CGST), state tax (SGST), integrated tax (IGST), or cess remitted by an individual with GST registration for supplied goods or services. This encompasses taxes paid under reverse charge and IGST on imported goods. However, it excludes taxes under the composite taxation scheme.
The Goods and Service Tax Act imposes taxes on goods and services, emphasizing the value addition principle. This provision allows businesses to offset tax liabilities on raw materials, consumables, machinery, and other acquisitions, known as input tax credit, preventing double taxation.
Input Tax Credit
Eligibility Criteria for Input Tax Credit Claim
To qualify for claiming input tax credit under GST, individuals must adhere to the specified conditions outlined below:
For those registered as taxable entities, claiming input tax credit necessitates specific documentation:
Step 1: Obtain an invoice from the supplier for goods or services rendered.
Step 2: Secure an invoice from the recipient, especially if procuring goods/services from an unregistered vendor. This falls under the reverse charge mechanism, pertained to transactions between an unregistered entity and a registered one.
Step 3: Retain a debit note from the supplier if the imposed tax is lesser than the required amount for the given supply.
Step 4: Provide a bill of entry or analogous documents to detail integrated tax on imported items.
Step 5: Keep an invoice or credit note issued by an Input Service Distributor in line with GST guidelines.
Step 6: Present a sales bill from a dealer enrolled in a composition scheme, or from exporters, or from suppliers dealing with exempt goods.
Under Which Circumstances Can Input Tax Credit be Obtained?
For claiming input tax credit within the GST framework, certain conditions must be met:
> Registration under GST law is a prerequisite.
> Possession of a valid tax invoice or debit note from the registered supplier displaying the applicable tax amount.
> Receipt of the goods or services is essential.
> The supplier is required to file returns and remit the due taxes to the government.
> If goods are received in stages or parts, credit can be claimed upon receiving the final portion or installment.
> Failure to claim within the specified timeframe may result in the denial of input tax credit.
Steps to Avail Input Tax Credit
Regular taxpayers are required to declare their Input Tax Credit (ITC) amount in the GSTR 3B form.
For provisional claims, taxpayers can avail of up to 20% of the eligible ITC mentioned in the auto-generated GSTR 2A return. It's crucial to verify the GSTR 2A details before finalizing the GSTR 3B form.
Prior to October 9, 2019, taxpayers had the flexibility to claim the entire provisional input tax credit. However, as per the CBIC's directive from that date onward, they can only claim 20% of the ITC mentioned in GSTR 2A.
The ITC reflected in GSTR 3B will comprise both the actual ITC from GSTR 2A and the provisional 20% of eligible ITC from GSTR 2A. Ensuring alignment between purchase records and GSTR 2A is essential.
Conditions for Reversing Input Tax Credit
Input Tax Credit reversal is mandated under specific scenarios:
- Non-payment to the supplier within 180 days from the invoice issuance.
- Utilization of goods and services, including inputs or capital goods, for personal purposes.
- Disposal of capital assets or machinery on which ITC was claimed.
- Issuance of credit notes by the input service distributor.
- Transactions deemed ineligible under section 17(5) of the Act.
- Transitioning from a regular to a composite dealer status results in ITC reversal.
- The reversed amount can be adjusted against the output tax liability for the respective month.
- Interest accrues from the ITC claim date until its reversal and payment.
- There's no time constraint for reclaiming the reverted credit.
Input Tax Credit for Capital Goods
ITC isn't accessible for capital goods solely utilized for producing tax-exempt items or for personal use.
However, ITC becomes permissible if depreciation on the tax portion of such capital goods has been claimed.
Input Tax Credit on Job Work
When a primary manufacturer forwards goods for additional processing to a job worker, ITC is granted under the following circumstances:
- Dispatched from the primary business location
- Directly from the supply location of the goods' supplier
To qualify for ITC, the goods must return to the primary entity within a year.
Input Tax Credit by the Input Service Distributor
An Input Service Distributor, whether the main office, branch, or registered location under GST, accumulates and distributes ITC from purchases to all beneficiaries.
Input Tax Credit during Business Transfers
Relevant during mergers, amalgamations, or business transfers, the transferor retains available ITC, which is then transferred to the acquirer during the business transition.
In the context of GST, input tax credit doesn't apply to certain goods or services, including:
- Motor vehicles, unless used for specific taxable activities like:
- Passenger transportation
- Driver training
- Further supply or transportation of these vehicles
- Cargo transportation
- Supplies related to food, beverages, outdoor catering, beauty treatments, health services, and cosmetic surgeries, unless used by a registered entity for a corresponding taxable service.
- Memberships in clubs, health, or fitness centers.
- Services like cab rentals, life and health insurance, except when mandated by law for employers.
- Employee travel benefits, such as leave or home travel concessions.
- Inputs for constructing immovable property, excluding plant and machinery, unless for a works contract service.
- Inputs used for self-construction of immovable property, barring plant and machinery.
- Goods/services under the composition scheme.
- Goods/services intended for personal consumption.
- Goods given as gifts, lost, written off, or used as free samples.
- Taxes paid due to fraud, misstatement, or intentional suppression.
- Taxes paid for the release of seized or confiscated goods.
