Claiming Benefits of GST paid on Business expenses (Simplified)

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The concept of GST is similar to that of VAT and Service Tax, which was applicable earlier. The only difference between the two is the mechanism of taking Input Tax Credit.

In this article we will tell you how you can take the benefit of GST paid on your purchases and set it off with your GST liability.

What is Input tax credit?

Input tax credit means that the tax paid on your purchases is allowed as credit which can be set off from your GST payable liability.

Input tax credit was available in VAT and Service Tax as well. However, there it was not possible to take Input Tax Credit on Central Sales tax, Entry Tax, and other taxes. Also the manufacturers were not able to take credit of the Excise Duty payable.

In GST, since all the taxes are combined, input tax credit is now available for the taxes that were earlier not available.

To understand input tax credit on GST better, let’s take an example,

Say, a manufacturer pays Rs. 50 as GST on the raw material purchased and his final product costs Rs. 500. Assuming the GST rates on his product is 18%, the GST liability comes out to be Rs. 90. So when paying Rs. 90 as GST on the sale of his final product he can claim the Rs. 50 GST paid earlier. The net liability will then amount to Rs. 40, (90 – 50).

This mechanism where you can set off the amount paid as GST with your GST liability is called Input Tax Credit.

Who can claim input tax credit on GST?

The input for GST can only be claimed if the person who intends to claim GST is a registered dealer and the goods that he has purchased is also from a registered dealer.

If a person buys goods from a dealer who is registered under the composition scheme then he cannot avail the input tax credit. Also, if you are yourself registered under the composition scheme, you cannot avail the input tax credit.

How to claim input tax credit?

There are three components of GST,

  1. CGST- Central Goods and Service Tax
  2. SGST- State Goods and Service Tax
  3. IGST- Interstate Goods and Service Tax

The CGST and SGST are levied equally on goods sold within the state i.e. intrastate. For instance, if the rate of GST on a particular good is 18%, it means that the GST will be charged as CGST- 9% and SGST- 9%.

In case of interstate purchases, where the goods are sold from one city to another, IGST is charged as GST.

Although, all of the three are GST, the way Input Tax credit is adjusted among the three is different.

 

Credit/ Liability CGST SGST IGST
CGST I II
SGST I II
IGST II III I

 

The above table represents the set off that can be made against the different types of GSTs. The first column represents the input tax credit available for each type of GST and the first row represents the liability against each of the GSTs.

Input Tax credit of CGST has to be set off against the CGST liability first and then towards IGST liability, if any. It cannot be set off against the SGST liability.

For instance, say a person has sold goods within the state where the GST liability that arose was Rs. 50,000. The input tax credit available was Rs. 55,000. He also sold goods outside the state for which the IGST liability stood at Rs. 20,000.

Let’s break up the complete information and use the table above to calculate the liability adjustment,

Particulars Amount
GST Liability 50,000 (CGST- 25000, SGST- 25000)
IGST Liability 20,000
Input Tax Credit 55,000 (CGST- 10,000 ; SGST- 10,000 ; IGST- 35,000)

 

 

Credit/ Liability CGST (25,000) SGST (25,000) IGST (20,000)
CGST (10,000) 10,000
SGST (10,000) 10,000
IGST (35,000) 15,000 20,000
Net Liability 15,000

 

In the above table you can see how the credit available against each GST credit is adjusted against the corresponding liability.

In the first row, we have a credit available of Rs. 10,000 in respect of CGST. The CGST can be set off against CGST first and then against any other liability. Here, since the CGST liability (25,000) was more than the CGST credit (10,000) it was completely used up in the same and did not have enough balance left for adjusting against IGST.

Similarly, SGST also had limited credit balance which could be adjusted against SGST liability only.

In the third row, the IGST credit was Rs. 35,000 where as the corresponding IGST liability was Rs. 20,000. So, out of the Rs. 35,000 credit it was first adjusted against the IGST liability of Rs. 20,000. After adjusting with the IGST liability, CGST comes next followed by SGST. Therefore, after adjusting with IGST, the balance of Rs. 15,000 was adjusted against the CGST liability. The balance CGST liability left after the first adjustment (with CGST) was Rs. 15,000. Since, the IGST balance credit was equal to the balance CGST liability, i.e. Rs. 15,000 it was completely set-off.

This is how the input tax credit is availed for the three types of GSTs.

Although this is how the credit is claimed, one cannot claim GST paid on all types of purchases. There is a list of purchase items on which even if the GST is paid, it cannot be claimed for GST input tax.

Purchases for which one cannot claim Input Tax Credit

Items for which credit is not allowed
S.No. Goods Exception Services Exceptions
1 Meant for personal consumption Meant for personal consumption
2 Motor Vehicles Allowed in following cases –

i.) Further supply of such vehicle or conveyance (e.g. credit of tax paid on cars by the manufacturer will be available to a car dealer);

ii.) Taxable supply of transportation of passengers

iii.) Taxable supply of imparting training on driving, flying, navigating such Updated on 01-05-2018 6 vehicles or conveyances; (e.g. tax paid by dealer on sale of cars will be available as credit to a car driving school).

 Outdoor catering Credits are allowed if the service is used for providing same category of service
3 Goods lost, stolen, destroyed, written off Beauty Treatment Credits are allowed if the service is used for providing same category of service
4 Goods disposed off by way of gift or free samples Health Services Credits are allowed if the service is used for providing same category of service
5 Goods received for construction of immovable property on own account (other than plant and machinery) Cosmetic and plastic surgery Credits are allowed if the service is used for providing same category of service
6 Membership of club, health & fitness center
7 Travel benefits to employees
8 Rent a cab Can be allowed by way of notification if mandatory on part of employer to provide these facilities. If these services are used as an input for supply of same category of service or as an element of a taxable composite or mixed supply, tax credit will be available.
9 Life insurance, Health insurance Can be allowed by way of notification if mandatory on part of employer to provide these facilities. If these services are used as an input for supply of same category of service or as an element of a taxable composite or mixed supply, tax credit will be available.
10 Works contracts for construction of immovable property other than Plant and Machinery. Allowed if used for providing work contracts service e.g. tax paid by subcontractor for construction of a factory administration building is available as credit to the main contractor for payment of its liability, however the tax paid by the main contractor will not be available to the factory owner / manufacturer.
11 Services received for construction of immovable property on own account.

The GST paid on the purchase of above mentioned goods and services, (subject to the exception,) will not be allowed as GST Input Tax credit and therefore the GST liability cannot be adjusted against it.

The process of how the input tax credit is availed in GST

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 is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.