GST has been implemented by subsuming different taxes with one of the objectives of avoiding the cascading effect of taxes. I.e., the effect of the tax on tax. To overcome this effect, GST consists of a concept called an Input Tax Credit.
Input Tax Credit means reducing the tax liability on outputs by the amount of taxes paid on inputs. It is a procedure to avoid charging of tax on the tax already paid on inputs.
Say, a business purchased the raw material for manufacturing its final product for Rs 100. On such purchases he is liable to pay GST at a certain percentage say @18% i.e. Rs 18 in this case. Rs 18 being known as tax paid on inputs or input tax. Moreover, on selling such product after value additions say for Rs 200 , they collect certain taxes presumed @28%. Which is known as payment of output tax amounting to Rs 56 in this case. Applicability of input tax credit mechanism requires them to deposit the differential tax (output tax liability – input taxes already paid) with the government ie. Rs 56-18= Rs 38 is only the net payable amount, not the whole amount they have collected ie. Rs 56.
The prerequisites for taking the input tax credit are as follows:
Only a person who is registered under GST is entitled to take credit of tax paid on inward supplies, i.e., purchases of goods or services or both used in the course of furtherance of business. Means Unregistered suppliers are not allowed to take input tax credit for the amount of tax paid on inward supplies of goods or services or both.
The input tax credit is available to a person who is registered including the input service distributor, based on any of the following documents, namely
The input tax credit shall be available to the registered person only if:-
A registered person cannot avail the ITC until he does not receive the goods. In case of “bill to ship to” model, where the goods are delivered to a third party on the direction of the registered person who purchased the goods from the supplier then it shall be deemed that the person receiving the goods is a registered person.
For availing the input tax credit, the registered person who charged the tax in respect of such supply has been paid to the government. The payment can be made either in cash or through utilizing the input tax credit.
A registered person can only claim the credit or refund of ITC through the return, so he has to file the return as per section 39.
If the registered person has claimed depreciation on the cost of capital goods under the provisions of the Income Tax Act, 1961, then the ITC shall not be allowed on the tax component.
Thus we can say that the government will not provide you the double benefit on the tax components. As per the government, you cannot claim both the depreciation and ITC as per GST law on tax component at a time. Means either you can claim depreciation on tax component or ITC of such tax paid.
According to Section 16 of the CGST Act, 2017, A registered person is entitled to take the input tax credit for any debit note or invoice for the supply of goods or services or both before:
There are three types of taxes available under GST, i.e., CGST, SGST, IGST. Moreover, the same is available to take the credit on input. Their credit can only be set off for specific purposes. The following are the restriction on utilizing credits of various input taxes available:
The input tax credit concerning inputs or input services, which are being
| Total input tax related to inputs and input services in a tax period | T |
|---|---|
| Less: Input tax on inputs and input services that are intended to be used exclusively for a nonbusiness purpose | (T1) |
| Less: Input tax on inputs and input services that are intended to be used exclusively for exempt supplies | (T2) |
| Less: Input tax which is ineligible for a tax credit (Blocked credits) | (T3) |
| ITC Credited to Electronic Credit Ledger | C1 |
| Less: Input tax on inputs and input services that are intended to be used exclusively for taxable supplies including zero-rated supplies | (T4) |
| Common ITC available for apportionment | C2 |
D1= (E/F) x C2
D1 = the amount of input tax credit attributable to exempted supplies
E = The aggregate value of exempt goods or services during the tax period
F = The total turnover of the state of the registered person during the tax period
C2 = Common credit available
D2 = 5% of C2
D2 = the amount of input tax credit attributable to nonbusiness purpose
C3 = C2 – (D1 + D2)
C3 = the eligible input tax credit from the common credit
Note: The amount equal to the aggregate of D1 and D2 shall be included in the registered person ‘s output tax liability.
