GST Input Tax Credit (ITC) – Explained with Examples

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Input Tax Credit means claiming the credit of the GST paid on purchase of Goods and Services which are used for the furtherance of business. The Mechanism of Input Tax Credit is the backbone of GST and is one of the most important reasons for the introduction of GST.

As GST is a single tax levied across India (right from manufacture of goods/ services till it reaches the end customer), the chain does not get broken and everybody is able to take benefit of the same and there is seamless flow of credit.

Mechanism of Input Tax Credit

The Mechanism of Input Tax Credit can be claimed with the help of the following example:-Example

In the above mentioned example, Karan Batra has charged Rs. 90,000 as GST to his clients in a month, but he is only required to deposit Rs. 82,080 with the Govt as he has claimed Input Tax Credit of GST paid on goods and services used for the furtherance of his business.

Under the previous indirect tax regime of levy of Service Tax, VAT, Excise – a lot of input tax credit was not properly utilised.

Earlier there were multiple types of indirect taxes and the input tax credit of one tax could not be claimed against the input tax credit of another tax.

For example: Retailers who used to pay Service Tax on Rent for their Shops were not able to claim Input Tax Credit of Service Tax with the VAT which they used to charge their customers on sale of goods.

However, such issues have now been removed with the introduction of GST as there is only a single indirect tax which would be levied and there would be seamless flow of credit.

Input Tax Credit of CGST/ SGST/ UTGST/ IGST

GST comprises of the following levies:-

  1. Central Goods and Services Tax (CGST) [also known as Central Tax] which is levied on intra-state or intra-union territory on supply of goods or services or both.
  2. State Goods and Services Tax (SGST) [also known as State Tax] which is levied on supply of goods or services or both within the same state.
  3. Union Territory Goods and Services Tax(UTGST) [also known as Union Territory Tax] which is levied on supply of goods or services within the same union territory.
  4. Integrated Goods & Services Tax (IGST) [also known as Integrated Tax) on inter-state supply of goods or services of both.

The input tax credit of these components of GST would be allowed in the following manner:-

  1. Credit of CGST – Allowed 1st for payment of CGST and the balance can be utilised for the payment of IGST. Credit of CGST is not allowed for payment of SGST.
  2. Credit of SGST/ UTGST – Allowed 1st for payment of SGST/UTGST and the balance can be utilised for the payment of IGST. Credit of SGST/ UTGST is not allowed for payment of CGST.
  3. Credit of IGST – Allowed 1st for payment of IGST, then for payment of CGST and the balance for payment of SGST/ UTGST.

This has been explained in the following table:-

Credit of To be utilised 1st for the payment of Maybe utilised further for the payment of
CGST CGST IGST
SGST/UTGST SGST/ UTGST IGST
IGST IGST CGST, then SGST/ UTGST

Allowance/ Disallowance of Input Tax Credit

Under the GST Regime, ITC can be claimed by every registered taxable person on all inputs used or intended to be used (whether goods or services) in the course of or for the furtherance of business. (except in certain specified cases)

The specified cases where the input tax credit would not be allowed are mentioned below:-

S.

No.

Input Tax Credit not allowed for GST paid on Exception (i.e. GST Input Tax Credit allowed for these goods/ services only in case of the following
1. Motor Vehicles & other Conveyance Allowed only when they are supplied in the normal course of business or are used for providing the following taxable services:-

a.       Transportation of Passengers, or

b.      Transportation of Goods, or

c.       Imparting Training on Motor Driving Skills

2. Food & Beverages, Outdoor Catering, Beauty Treatment, Health Services, Cosmetic & Plastic Surgery Allowed only if the goods and/or services are taken to deliver the same category of services or as a part of composite supply, the credit would be available.
Example: Mr. A purchases cosmetic creams to supply to her customer. In case a case, ITC paid on purchases would be allowed.
3. Membership of Club or Fitness Centre or Health Centre
4. Rent-a-Cab service, Health Insurance and Life Insurance Allowed only if

a.       The Govt makes it obligatory for the employers to provide it to their employees, or

b.      In cases where the goods and/or services are taken to deliver the same category of services or as a part of composite supply.

5. Travel Benefits to Employees. Eg: Leave Travel Allowance
6. Works Contract Services, when supplied for the Construction of Immovable Property Allowed only if

a.       Works Contract Services supplied for Construction of Plant & Machinery

b.      One Works Contract Service is input for another works contract service

7. Goods and/or Services for Construction of Immovable Property, whether to be used for Personal or Business use.
8. Goods/ Services on which GST has been paid under the Composition Scheme
9. Goods/ Services received by a Non-Resident Taxable person Allowed for Goods/Services imported by a Non-Resident taxable person
10. Goods/ Services used for Personal Consumption
11. Goods which are lost/ stolen/ destroyed/ written off/ disposed of by gift/ free sample
12. Any tax paid due to
a. Non-payment of tax, orb. Short payment of tax, orc. Excessive Refund
13. ITC utilised or availed by way of
a. Fraud, or
b. Will-full mis-statements, orc. Suppression of Facts

 

The Input Tax Credit of GST paid on all other goods and services which are used for the furtherance of business would be allowed.

Conditions for Claiming Input Tax Credit under GST

Only a Registered Person would be able to claim the benefit of Input Tax Credit of GST. Moreover, a registered person would be eligible to claim input tax credit on fulfilment of the following conditions:-

  1. He is in possession of Tax Invoice or any other specified tax paid document.
  2. He has received the goods or services. “Bill to ship” scenarios also included.
  3. Tax is actually paid by the supplier.
  4. He has furnished the GST Return.
  5. If the inputs are received in lots or installments, he would be eligible to avail the ITC only when the last lot or installment is received.
  6. The payment should be made within 180 days from the date of issue of invoice. In case the payment is not made within 180 days, failing which the amount of credit availed by the recipient would be added to his output tax liability along with interest. However, once the amount is paid, the recipient would be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed.

Documents on the basis of which the ITC can be claimed

  1. Invoice issued by supplier of goods or services or both.
  2. Invoice issued by Recipient along with proof of payment of Tax.
  3. A Debit note issued by the supplier.
  4. Bill of entry or similar document prescribed under the Customs Act.
  5. Revised Invoice.
  6. Document issued by the Input Service Distributer.

ITC allowed only for Goods and/or Services used for Business

  1. Input Tax Credit is not allowed for Goods and Services used for Personal Use.
  2. When Goods and/or Services are received partly for Business and partly for personal use, one can avail ITC but only for the portion which is used for Business.
  3. 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.
  4. ITC is not allowed on the portion used for making exempt supplies.

Input Tax Credit in case of Imports

Under the GST Regime, the input tax credit of IGST and GST Compensation Cess is available to the importer. However, the input tax credit of Basic Customs Duty (BCD) would not be available.

In order to avail ITC of IGST and GST Compensation Cess, an importer has to mandatorily declare GST Registration number (GSTIN) in the Bill of Entry.

The Customs EDI system would be inter-connected with the GST portal for the validation of ITC. Bill of entry in the non-edi locations would be digitized and used for validation of input tax credit provided by the GST portal.

Other Relevant Points regarding GST Input Tax Credit

  1. Input Tax Credit can be availed by a registered person only if all the applicable particulars as prescribed in the Invoice Rules are mentioned in the Invoice.
  2. If the tax paid on inputs is more than the tax paid on output, the ITC can either be carried forward or claimed as refund.
  3. The balance tax after claiming the input tax credit shall be deposited with the govt by the 20th of the next month in GSTR 3.
  4. Claiming of ITC would not be allowed beyond September of the following Financial Year to which the invoice pertains or the date of filing of Annual Return whichever is earlier.
  5. A person who has applied for GST Registration within 30 days of becoming liable for Registration is entitled to claim ITC in respect of goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax.
  6. A person switching over to the normal scheme from the composition scheme under Section 10 is entitled to ITC in respect of goods held in stock and capital goods on the day immediately preceding the day from which he becomes liable to pay tax as a normal taxpayer.
  7. Where an exempt supply of goods or services or both becomes taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply.
  8. In case of change of constitution of a registered person on account of sale, merger, demerger etc. the unutilised ITC shall be allowed to be transferred to the transferee.
  9. The GST paid under the Reverse Charge Mechanism can also be claimed as Input Tax Credit.
  10. The Input Tax Credit is also allowed on GST paid on Capital Goods.
  11. No ITC would be allowed if Depreciation has been claimed on the Tax component of the Capital Goods.
  12. The details of GST paid on inputs would be auto-populated in the GSTR 2. However, the details of GST paid on Inputs on Reverse Charge basis would not be auto-populated. The details of GST paid on Reverse Charge Basis would be manually required to be furnished in the GSTR 2.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.