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.
Conditions for taking an input tax credit
The prerequisites for taking the input tax credit are as follows:
- Only registered taxpayers are allowed to take the benefit of ITC
- Conditions to be satisfied for taking ITC are
- Requisite Documents to be presented for proving your ITC claim
- A document must contain relevant information
- Receipt of goods or services shall be produced
- Tax charged is duly paid to the government
- Filing of return
- If depreciation is claimed on tax component, ITC will not be admissible
- Time limit for availing ITC
- Apportionment of the input tax credit
- ITC treatment in case of input goods and services
Who can claim ITC under GST (Goods and Services Tax Law) in India?
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.
Conditions to be satisfied for taking ITC
There are some conditions prescribed under the GST Act for availing the input tax credit. Some of the essential conditions are as under:-
Documents required for ITC
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
- An invoice issued by the supplier in accordance with the provisions of section 31of the CGST Act 2017
- A debit note issued by the supplier in accordance with the provisions of section 34 of the same act.
- Invoice issued by the recipient along with the proof of payment (Received from an unregistered person and as per Reverse charged)
- Invoice or credit note or any document issued by an input service distributor
Document must contain relevant information
The input tax credit shall be available to the registered person only if:-
- All the applicable particulars are contained in the documents
- Descriptions of goods and services
- The total value of goods and services
- Amount of tax charged
- Place of supply in case of supply
- GSTIN of receiver and supplier
Receipt of goods or services
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.
Tax charged is paid to the government
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.
Filing of return
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 depreciation is claimed on tax component, ITC will not be admissible
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.
Time limit for availing ITC
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:
- The due date for furnishing the return, u/s 39 of CGST Act, for the month of September following the end of the fiscal year, or
- Furnishing of relevant annual return,
Apportionment of credit
- In case of service or goods partly used for business and partly for the nonbusiness purpose, then the amount of credit shall be limited to the part on input tax that is attributable to the business.
- ITC shall be restricted to goods or services used for taxable supplies is the same are used for effecting taxable supply as well as exempted supply. ITC may be availed on inward supply for making the zero-rated supply.
Utilization of Input Tax Credits
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:
- IGST credit,
- First, the credit is available to set off against IGST credit,
- Then for balance (if any) set off with CGST and then SGST/UTGST.
- CGST credit,
- It is to be utilized against IGST and
- then balance with CGST,
- SGST Credit,
- It can be utilized to set off for IGST, and
- Then the balance for SGST/UTGST .
ITC treatment in case of input goods and services
The input tax credit concerning inputs or input services, which are being
- partly used for business and
- partially for other purposes, or
- being partly used for effecting taxable supplies including zero-rated goods and services and
- partly for changing exempt supplies shall be attributed to the purpose of business or
- for influencing taxable supplies in the following manner, namely:-
Step 1: First, we need to calculate common credit
|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|
Step 2: Now we will calculate the credit attributable to exempt supplies (Ineligible credit) by the apportionment of the common credit
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
Step 3: After that, we need to calculate the amount of the credit attributable to nonbusiness if common inputs and input services are used partly business and partly for the nonbusiness purpose
D2 = 5% of C2
D2 = the amount of input tax credit attributable to nonbusiness purpose
Step 4: Now we will calculate the total eligible ITC
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.
Some situations in which ITC cannot be claimed:
- Motor Vehicle and other conveyance purchased except when used for supplying such vehicles, imparting training on driving or transportation of passengers/ goods, navigating or flying such vehicles
- Rent-a-cab, Life and health insurance except where such services are obligatory for an employer to provide to its employees
- Food Beverages, outdoor catering, health service, beauty treatment and cosmetic and plastic surgery except when used as a part of taxable as the supply of nature of composite or mixed
- Works contract services for construction of the immovable property except when it is an input service
- Travel benefit provided to employees as home travel concession or leave
- Construction of immovable property on his account which includes reconstruction, renovation, additions or repairs. Goods/services used for construction or even when it is used for the furtherance of business
- Goods/services received for personal consumption
- Membership in a Health and Fitness Centre and club
- ITC will not be available for the goods/services received by the non-resident taxable person
- Goods stolen /destroyed/ written off/distributed as a gift or free samples
- Dealer under composition scheme- both the dealer and the receiver of goods from the dealer are not eligible to claim ITC.