GST structure allows taxpayers to claim input tax credit tax. In simple terms, while paying tax on output, you can subtract the tax you have already paid on inputs and pay only the balance amount.
How does it work?
At each stage of the supply chain, the buyer gets credit for the input tax paid. They can use it to offset the GST payable to the Center and State governments. When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales). The balance liability of tax (tax on sales minus tax on purchase) is paid to the government. This mechanism is use of input tax credit.
A registered person can claim Input Tax Credit only if he fulfills ALL the prescribed conditions:
- The dealer should have the tax invoice;
- Dealer receives said goods/services;
- Returns have been filed;
- The supplier has paid the tax to the government;
- When goods are received in installments, one can claim ITC only on receipt of the last lot;
- If depreciation is claimed on tax component of capital good, ITC is not allowed.
One cannot claim ITC cannot in the following cases:
- Buying capital goods used for non-business purposes.
- Composition dealers
- Buying capital goods used for manufacturing exempted goods
- On purchases where the buyer needs to pay tax on reverse charge basis
- Blocked credits [Section 17 (5)]
Documents required to claim Input Tax Credit
The documents required to avail ITC are:
- Invoice issued by the supplier;
- Debit Note issued by the supplier (if any);
- Invoice issued similar to Bill of Supply (in cases where the total amount is less than Rs. 200 or reverse charge mechanism is applicable);
- Bill of entry or similar documents issued by the Customs Department;
- Document issued by ISD, could be an invoice or credit note.
- Bill of supply issued by the supplier;
Claiming and reconciling Input Tax Credit :
Only business owners can claim ITC.
ITC will not be available on goods or services exclusively used for:
- Personal use;
- Exempt supplies;
- Supplies for which ITC is specifically not available.
The three tax credits can be used to offset one another.
Reconciliation of credits is done by matching your transactions with those of your customers or vendors. The Tax Department will verify the transactions from both ends using GST Identification Number (GSTIN). A person’s ITC claim has to match with the supplier’s details mentioned in his GST return.
In case of any mismatch, the tax authorities will inform the supplier and recipient about any inconsistency after the filing of GSTR 3.
Reversal of Input Tax Credit
GSTR-2 will contain details of reversal of ITC.
Apart from these, ITC will be reversed in the following cases-
1) Non-payment of invoices in 180 days– ITC will be reversed if invoices were not paid within 180 days of issue.
2) Credit note issued to ISD by seller– If a seller issues credit note to the Head Office, then he has to reverse the reduced ITC.
3) Inputs partly for business purpose and partly for exempted supplies or for personal use – Business owners have to reverse ITC used in the portion of input goods/services used for the personal purpose..
4) Capital goods partly for business and partly for exempted supplies or for personal use– This is similar to above except that it concerns capital goods.
5) ITC reversed is less than required- If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable. This is calculated after the annual return is furnished.
Time limits for claiming Input Tax Credit
One can claim Input Tax Credit for tax invoices and debit notes which are less than a year old. In any other case, the last date to claim ITC is the earlier of the following:
- Before filing valid GST returns for month of September, or
- Before filing a relevant annual return.
Special cases of ITC
1) ITC for Capital Goods
ITC is available for capital goods under GST except for the capital goods used for:
- Making exempted goods
- Non-business (personal) purposes
ITC is not allowed if a business owner claims depreciation on tax component of capital goods. To claim ITC, the principal must get the goods back within 3 years.
2) ITC on Job Work
A principal manufacturer may send goods for further processing to a job worker. In such a situation the principal manufacturer can take credit of tax paid on the purchase of such goods.
One can claim ITC on goods sent to job workers in both the cases:
- From principal’s place of business,
- Directly from the place of supply of the supplier of such goods.
Note that to enjoy ITC, the principal must get the sent goods within 1 year.
3) ITC on Transfer of Business
The transferror will pass the available ITC to the transferee in the following cases:
- transfer of business
4) ITC Provided by Input Service Distributor (ISD)
An Input Service Distributor (ISD) can be the head office or a branch office or registered office of the registered person under GST on all the purchases made. He then distributes it to all the recipients or branches under different heads like CGST, SGST/UT GST, IGST or cess.