How to Claim Input Tax Credit on Business Expenses

|Updated on: February 14, 2023

The input tax credit provisions under GST are framed with a border perspective to allow the tax credit on all the inward supplies. Now, businesses can claim input tax credit on all the inputs or input services which are “used or intended to be used in the course of, or for furtherance of business”. In simple words, if goods or services are used for the purpose of business, the tax paid on such inward supplies will be allowed as ITC.

This is a boon to businesses compared to erstwhile regime. Previously, the tax credit was allowed only on inputs or input services which were directly linked to output or output services. For example, as a trader, input VAT paid on purchase of goods was available as credit only on making a taxable sale. However, any tax paid on business overheads like advertisement services, maintenance charges, and so on, were not allowed as credit.

The introduction of “Furtherance of Business” as a concept for Input Tax Credit will reduce the cost of operation and directly enhance the profitability of the business. The following are the important aspects to keep in mind, to avail input tax credit on business expenses:

ITC eligible only on supplies from registered businesses

You will be eligible to avail input tax credit only when you deal with registered businesses. Therefore, it is always recommended to transact with a supplier who is registered.

For certain business expenses, you may have to transact from unregistered dealer. Although ITC on such inward supplies is available, it will increase your compliance burden. It will also lead to temporary cash blockage since you are required to pay tax on reverse charge mechanism, and credit is available only after the tax remittance.

Tax invoice in company name with GSTIN

Ensure that the tax invoice is raised in the name of the company, and make sure that the GSTIN is mentioned in the tax invoice. This is very crucial because the ITC availability completely depends on the matching of invoice between the supplier and the recipient.

Mention the right GSTIN

In case, your business has multistate operation and have multiple registration, ensure that the local state GSTIN is mentioned in the Invoice. For example, you are registered in Karnataka and Maharashtra. For expenses incurred in Maharashtra, provide Maharashtra registration. This is because certain specific business expenses like hotel accommodation, events, food expenses, and so on, are always considered to be intrastate supplies, and CGST+SGST is levied. Considering the existing restriction on cross-state ITC (CGST+SGST) adjustment, mentioning different state GSTIN number will restrict you from availing ITC on such inward supplies.

Take care of supplies mentioned in negative List

Although GST allows ITC on all inward supplies, there are certain type of supplies on which input tax credit is not allowed. Ensure that those supplies are identified, and appropriate reversal is done before making ITC claim. Else, you may be asked reverse ITC along with the interest. To know more on the supplies forming part of negative list, please read out blog Your checklist for claiming ITC.

Any lapse in the above mentioned guideline will result into direct loss of ITC to the business. Therefore, businesses need to revisit the procurement policies and incorporate the changes in line with the provisions of GST. By doing this, any loss of ITC can be prevented and leverage on the benefits of tax credit.


TallyPrime Blog banner

Compliance is NO MORE complex! Ease of e-invoicing & accurate GST return filing with TallyPrime!