GST is consumption-based taxation levied at all stages in a value chain. Set-off of GST paid in the form of GST Input Tax Credit (ITC) is available at each step in the value chain. Finally, the incidence of tax burden shifts to the ultimate consumer to whom no such credit is available.
Goods and Services Tax is drafted in such a way so that tax is levied and collected at every stage and the input tax credit is available at every previous stage, which can be utilised to set off the tax to be paid in the following stages. GST neutralises the whole supply chain by allowing cross utilisation of input tax credits. The input tax credit is arguably the most lauded element of GST. Read on to know Input tax credit meaning, who can claim it, the documents required, the maximum time limit to claim ITC, and more.
GST Input Tax Credit (ITC) is the quantum of tax already paid by a registered person at the time of purchase of goods or services and which is available to the person as a deduction from his tax payable on the supply side.
In other words, when a manufacturer pays tax on his output, he can claim the credit of taxes he paid while procuring the input for his products or services. ITC has eliminated the cascading cost effect or tax on tax that previously existed. Earlier goods were taxed on each subsequent transfer till it was sold to the final transfer. During every transfer, the tax was levied on the taxable value plus the value of tax imposed in the previous step because no credit was available.
Suppose a registered manufacturer purchased raw material worth Rs.1,000 and paid GST@12% on the purchase, amounting to Rs.120. He processed the raw material, sold the final product for Rs.1500 and collected GST from the buyer @ 12%, amounting to Rs.180.
Ideally, the manufacturer should pay the entire amount collected from the final consumer to the government. Now he is eligible to claim the credit for the amount of GST he has already paid to the government at the time of purchase. In this case, the manufacturer is only liable to pay the government Rs. 60 (180-120).
Every person registered under the GST act is eligible to claim GST Input Tax. Every person liable to get registered under the GST act must apply for registration within 30 days from the day he becomes liable to get registered. The person could be Manufacturers, suppliers, agents, e-commerce operators, aggregators, or any other person mentioned and registered in the GST regime.
ITC can be claimed on the purchase of semi-finished goods and stock in trade held in stock on the day before the person becomes liable to pay output tax. Taxpayers voluntarily registered under the GST act are also eligible for claiming ITC under GST. Voluntarily registered taxpayers can claim ITC on semi-finished and finished goods held in stock one day before the day on which registration is granted. Similarly, taxpayers previously availing of the benefits of composition levy shift to the regular regime are eligible for claiming ITC.
Input Tax Credit is not available to everyone who purchases goods and services because that would mean the government gets no revenue. To avail of the input tax credit, the following conditions must be met:
The fact that you are registered under the GST act doesn’t make you eligible for ITC. A registered buyer should have the following documents:
Section 16(4) of the CGST act lays down the time limit for claiming ITC.
The due date for claiming ITC against a purchase invoice shall be earlier of:
There are some situations where ITC needs to be reversed even when all the basic conditions for claiming ITC are fulfilled:
In all the above cases, ITC claimed earlier must be reversed; failing to do so would attract a penalty.
There’s no maximum or minimum limit for claiming ITC. You can claim the whole of the input credit reflected in your 2A ledger.
GSTR-2A is an auto-populated return for each registered buyer consisting of details of the input tax credit. The GST portal automatically generates a dynamic return that fetches data from the GSTR-1 of sellers from which the buyer has purchased goods and services. GSTR-2A is meant for information purposes only as the information contained in it is subject to changes as and when sellers report additional changes.
However, to file GSTR-3B, buyers are advised to refer to GSTR-2B, a static version of GSTR-2A. Your eligible ITC is reflected in GSTR-2A when the seller has filed his GSTR-1 return for the respective month.
The GST act has expressly excluded the following items from the class of goods and services on which ITC can be claimed:
Certain industries are kept in the lower tax bracket with the condition that no ITC will be allowed on their services. Such industries with ineligible ITC under GST are:
The concept of input tax credit under GST can bring a sync between stakeholders, i.e., the government, the industry and the citizens. Business operations were never more streamlined than they are after the input tax credit was made available. A comprehensive input tax credit mechanism spread across the supply chain ensures there is no cascading of taxes which was one of the biggest discomforts for businesses in India.
Ans: No, not all purchases are eligible for ITC even though made by a registered person. Only those purchases intended to be routed in the course or furtherance of the business carried on by the registered person are eligible for ITC.
Moreover, there is a list of goods and services on which ITC is unavailable.
Ans: Yes, you can claim ITC even though actual payment is not made to the seller. However, you must pay the seller’s consideration and the tax on it within 180 days from the issue of the invoice. If you fail to pay the seller within the prescribed time limit, you will be required to reverse the ITC claimed against the invoice.
Ans: ITC is not available against goods destroyed by fire or destroyed for any other reason. Similarly, ITC is also not available against stolen goods.
Ans: Yea, the definition of ITC covers GST paid under reverse charge.
Note: the reverse charge is applicable in the case of notified categories of supply wherein the recipient of goods or services is liable to pay GST.
Ans: Yes, importers can claim the input tax credit on the IGST paid by them while importing goods or services to India. The IGST credit can be utilised to pay CGST / SGST / IGST.
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