Input Tax Credit (ITC) under GST

Pramit Pratim Ghosh |Updated on: August 11, 2023

• What is input tax credit
• Conditions to claim input tax credit under GST
• When does one become eligible to avail input tax credit under GST
• When does one become ineligible to claim input tax credit under GST
• Treatment of Input Tax Credit already availed in exceptional scenarios
• Documents on the basis of which the ITC can be claimed
• FAQ

What is input tax credit?

Ever since GST has been discussed across the country, the input tax credit has been spoken about in the same breath. In essence, ITC is the heart and soul of GST. One of the fundamental reasons, why GST is good for the nation, is, the seamless flow of input credit across the chain (right from the manufacture of goods till the end consumer) and across states, which earlier was not the case.

Under the Goods & Service Tax regime, ITC can be availed by every registered taxable person on all inputs used or intended to be used in the course of or for the furtherance of business – be it goods or services. Similarly, ITC will also be available on capital goods used in the course of business, except for a few exceptions.

Conditions to claim input tax credit under GST

In order to avail input tax credit under GST, a dealer needs to meet the following conditions –

• Must possess a Tax Invoice / Debit or Credit Note / Supplementary Invoice issued by the supplier
• Must have received the goods/services
• Must have filed returns (GSTR 3)
• Must ensure that the tax charged has been paid to the government by the supplier
• Must have completed invoice matching and would have arrived at the final ITC post reversals

When does one become eligible to avail input tax credit under GST

The following are the situations, in which a taxable person becomes eligible to avail ITC under GST –

If one applies for registration, on becoming liable to register in the GST regime

When one applies for registration under GST on becoming liable to register, one can avail ITC on inputs and inputs contained in semi-finished or finished goods in stock, on the day before the date on which one becomes liable to pay tax. However, this can happen only if one applies for registration within 30 days from the date on which one becomes liable to register and has been granted registration.

If one voluntarily applies for registration

If one voluntarily applies for GST registration, one can avail ITC on inputs and inputs contained in semi-finished or finished goods in stock on the day before one is granted registration.

If one shifts from composition scheme to regular dealership

If one is registered under the composition scheme but the aggregate turnover crosses INR 50 Lakhs, one has to move away from the composition scheme and become a regular dealer. When one leaves the composition scheme and becomes a regular dealer, one can avail ITC on inputs, inputs contained in semi-finished or finished goods in stock, and capital goods on the day before the date on which one becomes liable to pay tax. The credit on capital goods will be reduced by percentage points, which will be notified.

When exempted goods or services become taxable

When goods or services declared as exempt from GST are made taxable, one can avail ITC on the following on the day before the supply becomes taxable:

• Inputs in stock and inputs contained in semi-finished or finished goods in stock, which are relatable to the exempt supply.
• Capital goods exclusively used for the exempt supply. The credit on capital goods will be reduced by percentage points, which will be notified.

When sale/merger/demerger/amalgamation/lease/transfer of the business occurs

In any of these cases, if there is a specific provision for transfer of liabilities, one can transfer the unutilized ITC to the sold, merged, demerged, amalgamated, leased, or transferred business.

When goods and/or services are used partly for business and partly for other purposes

When goods and/or services are used partly for business and partly for other than business purposes, one can avail ITC – but only on the portion used for the purpose of business.

When goods and/or services are used partly for taxable supplies and partly for exempt supplies

When goods and/or services are used partly for taxable supplies and partly for exempt supplies, one can avail ITC only on the portion used for making taxable supplies and zero rated supplies. ITC is not allowed on the portion used for making exempt supplies, and supplies where the receiver pays tax on reverse charge basis.

When goods are received in lots or instalments

When goods are received in lots or instalments, one can avail ITC – but only upon receipt of the last lot or instalment.

Purchase of pipelines and telecommunication towers

ITC on pipelines and telecommunication towers purchased can be availed in instalments – 1/3rd of the total input tax paid can be availed in the financial year of purchase, 2/3rd of the total input tax paid (including credit availed in the previous year) can be availed in the succeeding year, and the balance ITC on any subsequent financial year.

When does one become ineligible to claim Input Tax Credit under GST

The following are the situations, in which one becomes ineligible to avail ITC under GST –

Registration not applied for within 30 days from the date on which one becomes liable to register

If one has not applied for registration within 30 days from the date on which one becomes liable to register, one will lose the eligible ITC on inputs and inputs contained in semi-finished or finished goods in stock, on the day before the date on which one becomes liable to pay tax.

After the time limit for availing input tax credit is crossed

ITC must be availed within the earliest of the following dates –

• 1 year of the date of the invoice
• The date of filing of the return for September of the next financial year i.e. 20th October
• The date of filing of the annual return (due date is 31st December of the next financial year)

On supplies received for which payment has not been made within 3 months from the date of invoice

If the recipient has not made payment for supplies received, along with the tax payable within 3 months from the date of invoice, the ITC availed will be added to the recipient's liability, along with interest due.

On motor vehicles and other conveyance

ITC is not allowed on motor vehicles and other conveyance unless they are:

• Further supplied OR
• Used for transporting passengers or goods OR
• Used for imparting training on driving, flying, or navigating such vehicles or conveyances

Other Scenarios

Other scenarios, such as –

• On membership of clubs and health & fitness centres, rent-a-cab services and life & health insurance taken for employees, except notified services which are obligatory to be provided to employees
• On food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery
• On travel benefits to employees on vacation, such as leave or home travel concession
• On tax component of cost of capital goods, if depreciation has been claimed on the tax component
• On goods and/or services used as inputs by a composition taxpayer
• On goods and/or services used for personal consumption
• On goods and/or services used for making exempt supplies
• On goods and/or services where the receiver pays tax on reverse charge basis
• On goods lost, stolen, destroyed, written off or disposed of as a gift or free samples

Treatment of input tax credit already availed in exceptional scenarios

Apart from the above, the GST Input Tax Credit rules also lay down provisions in case of certain exceptional scenarios -

When a regular dealer who has availed ITC switches to the composition scheme

When a regular dealer who has availed ITC switches to the composition scheme, the person must pay back the ITC availed on inputs in stock, inputs in the semi-finished state, finished goods in stock and capital goods (reduced by the prescribed percentage points) on the day before the date of switching to the composition scheme.

When taxable goods and/or services become exempt

When taxable goods and/or services supplied by a person are notified as exempt, the person must pay back the ITC availed on inputs in stock, inputs in semi-finished or finished goods in stock and capital goods (reduced by the prescribed percentage points) on the day before the date of exemption.

Documents on the basis of which the ITC can be claimed

Documents needed to avail ITC are:

• Invoice issued by the supplier
• Invoice issued similar to Bill of Supply, if the cumulative amount is lesser than Rs. 200
• Debit note from the supplier
• Bill of Entry or equivalent documents
• Bill of Supply from by the supplier 
• Document provided by ISD - invoice or credit note

Special cases of ITC

ITC for capital goods

Input Tax Credit is available for capital goods under GST. However, ITC is not available for the following - 

• Capital Merchandise utilized solely for making exempted products
• Capital Merchandise utilized only for non-business purposes

It is to be noted that ITC will not be permitted if devaluation has been claimed on the tax component of capital goods.

ITC on job work

A manufacturer may not execute the end-to-end production and send goods to a job worker for further processing. During such a situation, the main manufacturer will be permitted to avail credit for tax paid on the purchase of such goods. In both instances, goods sent to a job worker will be eligible for ITC:

• From the main manufacturing facility directly 
• From the supplier's point of supply

ITC by Input Service Distributor (ISD)

Under GST, an input service distributor (ISD) can be the registered person's head office, branch office, or registered office. ISD distributes the input tax credit to all recipients under various headings, such as CGST, SGST/UTGST, IGST, or cess, on all purchases.

FAQ

What is input credit?

Taxpayers who are covered in GST Act. can avail input credit. Input tax refers to the mechanism whereby you can get tax deductions that you have paid on the inputs at the time when you are paying the tax on the output. Input tax credit or ITC enables businesses to reduce the tax liability as it makes a sale by claiming the credit depending on how much GST was paid on the business’s purchases.

For example, let us say you manufacture a product and the tax payable on output is Rs. 1500 while the tax paid on input is Rs. 1000. The input credit is Rs. 1000 and so you are only required to deposit Rs. 500 in taxes. This is because the final product is Rs. 1500 while your purchases are Rs. 1000.

How to claim input credit under GST?

You must be eligible for input credit tax before you can claim it. It is important to note that you can avail the input credit only if the supplier has deposited the tax which has been collected from you during the transaction that took place between you two. That is, the verification process of the input credit is mandatory before you can claim ITC. Also, the suppliers have to be GST compliant in order for you to claim input credit.

You can claim a refund when the tax on the sale is lesser than the tax on the purchase. In such cases, there is often unclaimed input credit. In this case, you have an additional option of carrying it forward. You can claim the input tax credit on capital goods. However, you cannot claim input credit on all purchases. For example, input tax cannot be availed when you buy goods and services for your personal use. You cannot claim input credit if the purchase invoice is older than one year in most cases.

What is ITC eligibility?

As per the SGST and CGST Act, a taxable person who is registered as per the GST Act and is paying the tax due is eligible to claim ITC. There are certain conditions in place for him. He must have a tax invoice or debit note that has been issued by the supplier. He should have paid input tax or tax in cash as defined in section 41 of the GST Act. It is mandatory that he receives either both goods or services or one of them. Another condition is that he should have filed for returns as per section 39 of the GST Act.

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