Home»Blog»Income Tax»What Is Input Tax Credit (ITC) In GST? Eligibility And Documents Required To Claim ITC
What Is Input Tax Credit (ITC) In GST? Eligibility And Documents Required To Claim ITC
18 July 2022
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.
Understanding Input Tax Credit with an Example
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.
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.
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.
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.
FAQs on GST Input Tax Credit
Q1. Is Input tax credit available on all purchases made by a registered person?
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.
Q2. Can I claim ITC on a purchase before paying the supplier?
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.
Q3. Can I claim ITC on goods destroyed by fire?
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.
Q4. Can I claim GST paid under the reverse charge mechanism as ITC?
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.
Q5. Is Input tax credit allowed to an importer?
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.
Before you go…
Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!!
Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 8.39% p.a.
How about an affordable health insurance policy👨⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
Vikram Kirloskar Origins – From Bicycle Repair Shop to Toyota
Facial Recognition-based Entry System in Airport Launched. Know More!
15 Best Christmas Gift Ideas Even Santa Wouldn’t Ignore
RBI Launches Digital Rupee – Is it Like Crypto?
The G.O.A.T. – Messi’s 7 Life-Changing Quotes You Can’t Ignore
Mercedes or SIPs – Indians Tweet Their First Choice
How to Open Demat Account: Fees, Eligibility, Documents
Udd Gaye Totey: 9 Funny Tweets that Got Indians ROFL
10 Best Places to Celebrate New Year 2023 in India
We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.
Section 115BAA of Income Tax Act
The Government of India brought in multiple amendments to the Income Tax Act of 1961 through the Ta...Read More »
Best Tax Saving SIPs in 2023: 10 ELSS Funds You Can Consider Investing In Through SIPs
SIP or Systematic Investment Plan is one of the most effective tax-saving instruments. You can clai...Read More »
Professional Tax: 2023 Slab Rates, Exemptions & Applicability In India
Professional tax in India is levied on anyone who is employed. From professionals such as accountan...Read More »
What is Profit After Tax and How is it Calculated? Why is it Important for Companies?
An essential step for all organisations is to ensure that they continuously monitor the amounts of ...Read More »
What is Accounting Equation – Meaning, Formula and Calculation with Example
Regardless of the size of the company, financial statements are created using a basic accounting eq...Read More »
Cost Inflation Index: What is CII and How is it Calculated?
The price of commodities rises over time, reducing the purchasing power of money, which is the numb...Read More »
What is White-Collar Crime and What is the Penalty?
White shirts, black coats and well-ironed ties are typical stereotypes representing the rich and el...Read More »
Form 12B – Its Significance in Income Tax and How to fill it
When you join a new company in the middle of a financial year, you must complete several formalitie...Read More »
What is Cash Memo, Its Benefits and How to Create It?
All transactions in accounting must have accurate documentation as proof of financial trail. Docume...Read More »
What is Condonation of Delay in Law? What are its General Principles?
As per the Indian law, there is a certain time frame to submit all forms and applications to the Re...Read More »
Foreign Exchange Management Act (FEMA): Its Regulations and Penalties
Import and export are essential components of the aggregate trade that occurs in India. Import-expo...Read More »
What is Withholding Tax? What are its Rates? How is it Different from TDS?
The Central government of India levies income tax, a type of direct tax, on the income of individua...Read More »
Diwali 2022: Diwali Holidays – The Festival of Lights
The ‘Festival of Lights’ is one of the biggest and most anticipated festivals in India. This is...Read More »
Best Index Funds – Top 20 Index Funds in India
Index funds replicate the performance of a stock market index, such as the Sensex or Nifty 50 to ge...Read More »