What is Input Tax Credit (ITC) in GST – Eligibility and Documents Required To Claim ITC

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.

What is GST Input Tax Credit?

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.

Understanding Input Tax Credit with an Example

Suppose a registered manufacturer purchased raw material worth Rs.1,000 and paid [email protected]% 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). 

Also Read: Form 26AS: How To Download Form 26AS In 5 Simple Steps

Who can Claim Input Tax Credit?

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. 

Eligibility Conditions to Claim Input Tax Credit

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 receiver of services/goods must be a person registered under GST. Compulsorily registered or voluntarily registered, that’s not a matter of concern. 
• The person should have the tax invoice for the goods/services procured. 
• The purchaser should use goods and services for which ITC is claimed for business. ITC cannot be claimed on goods/services used for personal purposes, although the tax invoice is in the business’s name. 
• ITC can only be claimed when the delivery of goods is received. ITC shall be claimed only when the last lot is received when delivery is received in parts or lots. 
• The GST charged in the tax invoice is deposited to the government. 
• The registered person must file all the applicable GST returns. 
• GST input on capital goods is not available if depreciation is already claimed on the capital goods. 

Documents Required to Claim Input Tax Credit

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:

• Tax invoice against which payment is made to the seller. Note: Proforma Invoice might be considered for clearing payments, but the buyer must ask the seller for a tax invoice. 
• Where the buyer is liable to pay tax under the reverse charge mechanism or invoice value is less than Rs.200, the invoice issued or bill of supply should be procured. 
• Mere communication of purchase returns is not accepted; the buyer must ask for debit notes. 
• Bills of entry from customs department in case of import purchase. 

Maximum Time Limit to Claim Input Tax Credit

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:

• Filing the GST return for September of the subsequent year to the year the invoice relates. 
• Filing the annual return for the year the invoice or the debit note relates. 

Conditions where Reversal of GST Input Tax Credit is Required

There are some situations where ITC needs to be reversed even when all the basic conditions for claiming ITC are fulfilled:

• The recipient of services fails to pay the purchase consideration wholly or partly, within 180 days from the invoice date. 
• Depreciation has been booked on the GST composition of capital goods on which ITC was already claimed. 
• Inputs are utilised to make an exempted supply. 
• Inputs are used for non-business or personal consumption. 
• GST registration is cancelled. 
• Goods are destroyed in which inputs were used. 
• Goods were distributed as free samples in which inputs were used. 

In all the above cases, ITC claimed earlier must be reversed; failing to do so would attract a penalty.

How much Input Tax Credit Can be Claimed Each Month?

There’s no maximum or minimum limit for claiming ITC. You can claim the whole of the input credit reflected in your 2A ledger.

What is GSTR-2A?

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. 

Items on which Input Tax Credit is not Available

The GST act has expressly excluded the following items from the class of goods and services on which ITC can be claimed:

• Motor vehicles and conveyance except in the following cases
• The buyer is engaged in the business of motor vehicles.
• The capacity of motor vehicles is not less than 13 people.
• The vehicle is used in passenger transportation, imparting driving skills
• The motor vehicle is a truck, fork, JCB machine, Crane, etc.
• Ships, Vessels, Aircraft. 
• Food and beverages Outdoor catering services, Health services, etc.
• Rent a cab, for example, OLA, UBER, etc.
• General insurance services
• Works contracts undertaken for construction of immovable property except for Plant & machinery.
• Sale of membership of a club, fitness club. 
• Travel benefits provided to employees
• Tax paid by a person opting for composition levy. 
• Goods and services received by a non-resident. 
• Goods are distributed as free samples or used for personal consumption. 

Also Read: Section 234A: Delayed Filing Of Tax Returns, Due Date, Calculation And Interest Payable

Industries where ITC is not allowed

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:

• Restaurant industry: the tax rate applicable to restaurants is 5%; however, they cannot claim ITC on such tax. Thus they must book the tax as a cost. 
• Tour operator services: the tax rate applicable to tour operator service providers is also 5%, but they cannot avail of ITC. However, it can be claimed on services provided as a tour operator to other tour operators.

Final Word

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.

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