Input Tax Credit (ITC) Under GST

What is Input Tax Credit?

Input Tax Credit is the tax a buyer pays on the purchase of goods or services. Input credit means that when you pay output tax, you can deduct the tax you have already paid on the input.

In terms of the GST ITC rules, the input tax credit refers to the SGST/UTGST, CGST or IGST charged on the supply of goods or services made. It also includes IGST on import and tax payable under the reverse charge mechanism.

If you are an e-commerce operator, manufacturer, aggregator, agent, or supplier registered with GST, then you can claim an input tax credit for the tax you paid on your purchases.

Suppose you bought products worth INR 100 and paid INR 10 as GST on it at the rate of 10%. Now, when you sell these products at INR 150 and the GST on it is INR 15 (at the rate of INR 10%), the net tax liability will be INR 15 less INR 10 i.e., INR 5 (15 – 10 = 5).

Example of Input Tax Credit

To understand how GST ITC Rules work, it would be best to look at an example. Let’s assume you are a toy manufacturer and you buy plastic and other raw material worth INR 1,00,000 at a GST rate of 5%. Thus, the total amount you paid for this purchase would be INR 1,05,000.

Because you’ll be using the plastic and raw materials for your business, you’re eligible to claim an input tax credit of INR 5,000 by declaring it in your GSTR 3B form. You can adjust the same with your outward tax liability and deduct it.

Suppose you sell your finished product for INR 150,000 at a tax rate of 10%, your tax liability for this period is now INR 15,000. Because you had paid INR 5,000 as input tax, you can utilize your credit to reduce the tax amount when you pay the tax liability while filing GSTR-3B for that tax period. So, you only have to pay INR 10,000 as your outward tax liability.

Now, another question arises, how does ITC work when you’re filing GST returns?

In this scenario, your supplier will first file their GSTR-1 and declare the sale-related information in the same. The details filed by the supplier in their GSTR-1 will reflect in your GSTR-2A and GSTR-2 for that period. Next, you’ll have to file your GSTR-3B by using your GSTR-2 and GSTR-2A. You can compute your tax liability, your input tax credits, and the final adjusted tax liability you need to pay according to the GSTR-2A.

Latest Updates on GST ITC Rules

Update According to Budget 2021

Section 16 has been amended to enable taxpayers’ claim of the input tax credit based on GSTR-2B and GSTR-2A. Henceforth, the input tax credit on debit invoice can be availed only if the details of such debit invoice have been provided by the supplier in the outward supplies statement and the same has been conveyed to the recipient of the debit invoice.

Update on December 2020

1. Following changes have been made in Rule 36(4) from 1st January 2021:

• The input tax credit will be available as per the invoices uploaded by the respective suppliers either through the IFF (Invoice Furnishing Facility) or in their GSTR-1.
• A recipient can claim provisional ITC in GSTR-3B to the extent of 5% instead of the earlier 10% of the total input tax credit available in GSTR-2B for the month.

2. Particular taxpayers can’t make payments from their electronic credit ledger above 99% of the total tax liability for the tax period according to the new rule 86B.

3. Your GST Registration can get cancelled if you don’t comply with the conditions laid down under Section 16 of the CGST Act.

Update on April 2020

Taxpayers can claim ITC in the GSTR-3B return from February 2020 to August 2020 without applying the rule of capping provisional input tax returns claims at 10% of the eligible input tax credit according to GSTR-2A.

What are the Different Taxes under ITC?

The GST has three kinds of taxes: IGST, SGST, and CGST.

IGST stands for Integrated GST and is the single levy the Central Government collects for transactions between states. On the other hand, SGST stands for State GST which the State Governments collect for transactions occurring within a state. Finally, you have CGST which stands for Central GST which the Central Government collects for transactions taking place within a state.

You can use these tax credits to offset each other. You can use CGST credit to offset CGST liability and if you have any leftover credit, you can use it for the IGST liability. Similarly, you can use SGST credit to offset SGST liability and use its remaining credit to offset IGST liability.

You can use IGST credit to offset IGST liability and use its leftover credit offset CGST liability. After that, if you still have credit remaining, you can use it for the SGST liability.

What is the Eligibility Criteria for Claiming Input Tax Credit?

You must follow these GST ITC rules to claim input tax credit:

• The buyer must have a valid debit note, tax invoice, or other prescribed document issued by a registered dealer.

• The buyer must have gotten the goods or service. On the other hand, if the buyer is receiving the goods or service in instalments, then you can claim the credit against the tax invoice for the last installment.

• The supplier must have paid the due tax on the buyer’s purchases through cash or through claiming ITC.

• The supplier must have filed GST returns. Remember that with GST you can claim the input tax credit on your purchase only if the supplier is registered with GST and has paid the tax they received from you.

• The buyer must pay the supplier for the received supplies within 180 days since issuing the invoice to claim the input tax credit. If the buyer doesn’t do so, the available credit would get added to the output tax liability. When the buyer pays the due amount to the supplier by the taxpayer, they can avail input tax credit. If there are partial payments then they can avail credit proportionate to the payment amounts.

• Mandatory goods or services that an employer must provide to their employees under any law.

• Motor vehicles with a seating capacity of more than 13( (including the driver) that are used to transport people, aeroplanes, vessels, and money by or for a banking institution.

• Repair, maintenance, and general insurance of aeroplanes, vessels, and motor vehicles.

Required Documents for Claiming GST Input Tax Credit

According to the ITC rules under GST, you must provide the following documents to avail of Input Tax Credit:

• The invoice issued by the supplier.
• The Bill of Supply issued by the supplier.
• The Invoice issued for cases where the total paid amount is less than INR 200 or when the reverse charge mechanism is applicable.
• The Bill of Entry (or any similar document) issued by the Customs Department.
• The document issued by the Input Service Distributor (ISD), which could be a credit note or an invoice.
• A debit note issued by the supplier if there’s any.

You wouldn’t be able to claim GST ITC without providing these documents. Hence, make sure to double-check them while claiming.

How to Adjust ITC Inter & Intra State?

In this section, we’ll discuss how you can use ITC to offset output tax liabilities for inter and intra-state transactions.

Suppose your business is based in Uttar Pradesh and you make the following transactions for your business:

As you can see in the table above, your business has an IGST credit of INR 60,000 (INR 10,000 + INR 10,000 + INR 40,000) and the tax liabilities of CGST 20,000, SGST 30,000, and IGST 20,000. Now, according to the GST ITC rules, you must first use IGST credits to offset IGST tax liability. After that, if you have any IGST credit remaining, you can use it against CGST liability and then against SGST liability respectively.

First, we’ll use the IGST credit to offset the IGST liability. Then, we’ll use the remaining credit (INR 40,000) to offset the CGST liability (INR 20,000). Finally, we’ll use the left credits to offset the SGST liability and will be left with an SGST liability of INR 10,000.

Where can You Avail Input Tax Credit?

Following are some examples of cases where you can avail input tax credit according to the latest GST ITC rules:

• When you use a vehicle with seating capacity for more than 13 people including the driver.

• When you use goods or services partly for the furtherance of exempt supplies and partly for taxable supplies, you can avail ITC on the inputs for making taxable, zero-rated supplies.

• When you (a taxpayer) switch to the normal scheme from the composition scheme, you can avail input tax credit on capital goods you held till their last day as a composition dealer and purchases held as stocks (it might include semi-finished or finished goods).

• When you use goods or services partly for business uses and partly for other applications, you can avail input tax credit only on the inputs you used for business application.

• When you use a vehicle that is used to transport aircraft and vessels.

• For goods (or services) that an employer must provide their employees under any law.

• When you use vehicles that are used to transport funds for a financial institution.

• When you use certain services such as repair, vehicle maintenance, and insurance for which credit is applicable.

Also Check:

How to Utilize Input Tax Credit?

According to Rule 88A, a taxpayer must first use the input tax credits availed from integrated tax to offset all the applicable integrated tax. If there’s any input tax credit remaining after that, they can use it to pay UGST, SGST, and CGST. However, this rule applies only if the taxpayer uses the ITC availed from integrated tax entirely before using the ITC availed from UGST, SGST, and CGST.

Thus, based on the new ITC set off rules, you’d first use the payment for SGST to set off from IGST and then use the remainder to set off from SGST. Similarly, you’d use the payment for CGST to set off from IGST first then set off from CGST.