The input tax credit, or ITC, is the tax a business pays when it purchases goods and services. It can also be used to reduce its tax liability if it sells. Businesses can claim credit up to the GST paid on purchases to reduce their tax liabilities.
GST (Goods and Services Tax) is an integrated tax system that requires every business to match its purchase with the sale of another. This allows credit to flow seamlessly across the entire supply chain.
What is the ITC?
A trader selling a product to consumers collects GST. This GST is based on the HSN and destination of the goods. Let’s assume that the good has a MRP of INR 1000, and that GST applies at 18%. Consumers will pay INR 1180 total for the goods, which also includes INR 180 GST. The trader will be required to pay INR 180 to government if it does not have ITC. The trader can lower the amount of tax it has to pay by using input tax credit, or ITC. This is how it works.
Let’s assume that the price of the goods in the hands trader is INR825 This includes INR125 GST. Traders can claim INR125 input tax credit to reduce their original tax liability of INR180. The trader will be required to pay INR 55 (INR 180-INR 125) to government.
Conditions to claim ITC
ITC can be claimed by a business provided that the following conditions are met
• It is GST-compliant.
• The invoice has been uploaded by the supplier to the GSTN
• Its supplier has already paid GST to the government
• There have been returns
The input tax credit cannot be claimed by a business that is not enrolled in a composition scheme. ITC cannot be claimed on personal use or exempt goods.
Indirect tax regime before GST
Before GST was implemented, Indian goods that fell under the indirect tax regime were subject to tax by both the Centre and the United States. Services fell under the exclusive jurisdiction of the Central Government. The Central Government collected tax on goods up to the manufacturing stage. The state governments collected taxes on intrastate and interstate sales.
The three major components of indirect taxes for Central Government were Central Excise, Customs, and Service Tax. Along with Octroi and Entertainment Tax, Value Added Tax (VAT), Central Sales Tax (CST), were the major taxes for State Governments.
Impact on Taxpayers
This complex tax structure led to a multitude of taxes, and the most important, cascading taxes. Cascading does not permit you to offset taxes paid on inputs with output tax on goods or services, or vice versa. Taxes paid in one state could not be set-off against other taxes.
GST was therefore implemented to 1) consolidate multiple indirect taxes into one tax and 2) allow for the setting-off of taxes throughout the value chain. This is how to claim the input credit.
Credit for input tax
Input Tax Credit (ITC), a mechanism that reduces tax on tax, was included in the GST system to help avoid the problem of “tax on taxes”.
“Input” refers to any goods, other than capital goods, that you use or intend to use in the furtherance or course of your business. Input taxes are the taxes that are paid for the inward supply capital, inputs and services. These could include Integrated GST (Central GST), State GST, Union GST, or State GST.
Input Tax Credit is the deducting of tax on inputs from tax due on final output as a registered tax payer. This means that you can deduct the tax paid on inputs from the tax payable on your final output as a recipient. If you are a manufacturer, the tax paid on inputs and input services can be deducted from the tax on your output.
Let’s look at this example to get a better idea of ITC concepts:
Aryaman, a wholesaler, supplies goods worth Rs 2,00,000. to Binoy. After minor processing, Binoy sells the goods to Charan for Rs 2,20,000. GST @18% was applied.
Now, Aryaman supplies goods for Binoy. He collects Rs 36,000 from Binoy to pay GST, and the government pays the same. Binoy then sells the goods to Charan and collects Rs 39.600 GST from Charan.
Binoy has been charged GST for inputs. He can claim an input credit equal to the GST he paid. Rs 36,000. The Govt. receives Rs 36,000 as a balance. Binoy. Charan, final consumer, pays GST of Rs 39.600 to Binoy.
It is clear that neither the wholesaler nor retailer are subject to tax. Because each individual can offset their respective taxes on output, the tax they have paid is not subject to tax. Taxes are only imposed on the final consumer.
This clearly shows the elimination of the cascading effects of taxes in the former indirect tax system.
Conditions and eligibility to receive ITC
Section 16 of the CGST Act outlines conditions that you must fulfill as a supplier for goods or services in order to be eligible for ITC.
1. First, you need to be registered under the GST law.
2. You will then receive the tax invoice or debit note from the supplier of inputs.
3. You must either receive the goods or both.
4. The GST applicable to such supplies must be paid by your inputs supplier.
5. You must have filed the returns as required by section 39.
6. If you have received goods in multiples or installments, ITC can be claimed when the last lot has been received.
7. You cannot claim ITC if you have already claimed depreciation for the tax portion of the cost capital goods.
8. You will not be eligible to claim ITC if it is not claimed within the prescribed time.
Documents required to claim GST
You can claim ITC as a registered tax payer if you have the following documents
1. A bill issued by your supplier for goods and services.
2. You are the recipient of goods or services provided by an unregistered seller. This supply falls under the reverse charge system. This is a mechanism that allows supplies to be made by unregistered persons to registered persons.
3. In the event that the invoice’s tax is lower than the supply tax, your supplier will issue a debit note.
4. A Bill of Entry, or similar document, is required to implement a tax on imports.
5. A credit note or invoice issued by an input service distributor in accordance with the GST rules.
6. A Bill of Supply is issued by a dealer who opts for composition scheme, an exporter or supplier of exempt goods.
Reversal of the Input Tax Credit
In certain circumstances, the Input Tax Credit may need to be reversed. If you:
1. Failure to pay supplier within 180 days of the date the invoice was issued by supplier
2. You can use goods and services only for your personal use
3. Use goods and services to produce exempt supplies
4. Capital goods can be used for personal use
5. Capital goods and plant and machine sales
6. Change from regular GST to composite levies
1. Your registration has been canceled
2. Input Service Distributor is issued a Credit Note
3. ITC on inputs used to exempted purposes or for non-business purposes is greater than ITC reversed in the year
4. ITC reversed is greater than ITC on inputs used to an exempted purpose or non-Business purpose
You can find more information in our website about the GST filing and ITC
Reconciliation of ITC
The process of ITC matching begins after the due dates have passed for GST returns. The ITC Matching process is carried out by the online portal of Goods and Services Tax Network. Matching your outward supplies with your supplier’s outward supply details, as per GSTR 2, is done by all buyers.
If the details match, ITC claimed by ITC recipient is valid. If there is a mismatch in the details, then GSTR 3 will reflect the changes.
ITC may be denied if you fail to file your return or deposit tax by the deadline. Any excess ITC you claim will be added to your tax liability as a recipient.
ITC is used
Your electronic ledger will credit ITC. You can use such ITC as a registered tax payer to pay your output taxes. ITC can be used in the following way:
You can extinguish your CGST liability by using ITC standing first under CGST, then under IGST. Your SGST liability can also be extinguished by using ITC standing first under SGST, then under IGST. Your IGST liability can be eliminated by using ITC standing under IGST. You can then use ITC under CGST, and finally the ITC under SGST.
ITC in Special Cases
1. Send Goods to Job Worker
This applies to the principal manufacturer, who sent the goods to a worker to be further processed. If you, as the Principal manufacturer, do this, you can claim ITC for taxes paid on such goods that were sent to the job-seeker.
Even if the final goods are sold directly from the worker’s home, you can still claim ITC. This applies even if the goods are not returned to the principal’s place of business.
So goods that were sent to the job- worker should be returned to the Principal or sold directly from the job- worker’s premises for the Principal.
Normal goods: Within one year
– Within 3 years for capital goods
2. Distributor of input service
This is a term that refers to companies with multiple offices or units. An office that receives multiple invoices for supply of goods or services from suppliers is called the Input Services Distributor. This office could be any branch office, headoffice or registered office.
When ISD has claimed ITC for inward supply of goods or services, it credits the beneficiary units. The units’ previous year of turnover determines the distribution of ITC to the beneficiary units.
The credit will be distributed by the ISD under different categories such as CGST and SGST, UTGST or Cess.
3. Capital Goods
You can claim ITC on the inward supply capital goods . However, ITC is not allowed if the depreciation was claimed on the tax component cost of capital goods.
Additional ITC is not available:
1. Capital Goods that are used for personal or non-business purposes
2. Capital Goods for manufacturing exempted products
This case concerns the situation where a change in the constitution is caused by sale of merger, amalgamation, leasing or transfer of business. In such an instance, the transferor will pass the ITC that he has not used to his electronic credit ledger on to the transferee.
Framework for Infographic (For Designers Only).
It is possible to give a human figure a name. Let’s say Raman, who is a manufacturer. Let’s say Raman is confused about taxes. He has to pay them all. The central and state governments charge different amounts at different points in the value chain.
The Centre was empowered to levy a tax for the production of goods, except alcohol for human consumption and narcotic drugs.
The state excise was imposed on these goods, while the States had the power to levy tax on their sale. Only the Centre was able to collect and levy Service Tax in respect of Services.
Hence, Central Excise and Customs were the main components of indirect taxes for Central Government, while Central Sales Tax (CST), Value Added Tax, (VAT) and Central Sales Tax(CST) were major taxes for State Governments together with Octroi and Entertainment Tax.
This multiplicity of taxes led to the creation of
• Multiple taxable events in which taxes were levied on the same transaction or subject by different authorities.
• It is not possible to offset the taxes on input goods against the output tax on services, or vice versa.
• It was not possible to set-off against levies from other States or Central Governments. This led to a cascade of taxes that ultimately increased the price of goods.
Indirect Tax Structure before GST
After showing the scenario using the indirect structure, you can now explain it under the GST regime. What would Raman’s tax structure look like and how much he would be paid under the GST Regime? What will happen if there is no GST Regime? How Raman can claim an input credit under the GST regime
The green box below gives you an example. Let’s say Raman supplies goods to Karan, a wholesaler, for Rs 2,00,000. Karan then sells the goods to Garv, a retailer, at Rs 2,20,000, after minor processing. Garv then sells the goods for Rs 2,50,000 to Ananya. GST @18% was applied.
Now, Raman supplies goods for Karan and collects Rs 36,000 against GST from Karan. He also pays the same amount to the government. Karan sells the goods to Garv and collects Rs 39.600 GST. Karan has already paid GST on inputs. He can claim an input credit equal to the GST he paid for inputs. Rs 36,000.
The Govt. receives the balance of Rs 3.600. Karan. Similar to Ananya’s sale of goods to Garv, Ananya receives Rs 45,000 in GST. Garv has already paid GST on inputs. He can claim an input credit equal to the GST paid. The total amount paid for inputs was Rs 39,600. The Govt. receives Rs 5,400. Garv. Ananya, the customer, pays GST of Rs 45,000 Garv.
You conclude that neither the wholesaler nor retailer are subject to tax. Because each individual can offset their respective output tax liabilities against the tax they have already paid, this is why there is no tax incidence. Taxes are only imposed on the final consumer. __S.180__
This clearly shows the elimination of the cascading effects of taxes in the former indirect tax system.
• To illustrate the concept, you can use human figures such as Ananya, Karan, Garv and Karan.
You can then expand on the concept of Input tax credit under GST. Let’s start with “So What is Input Tax Credit?” __S.185__
1. What are inputs?
2. What are the taxes on inputs?
3. Let’s not forget to mention the Term Input Credit
Next, you can begin the next section by asking “So How will Raman become eligible for Claiming Input tax Credit?” __S.190__
• Raman must also be registered __S.192__
• Raman must have a tax invoice, or a debit card issued by the supplier or service provider of inputs. __S.194__
• Raman has to receive the goods and/or services, or both.
• The input supplier must have paid the GST that was levied by government for such supply.
• Raman should have filed returns under section 39.
• Raman can claim ITC if goods are received in multiples or installments.
• Raman may claim depreciation on tax as part of the cost capital goods. The ITC on this tax component will not be allowed.
• Raman will not be able to claim ITC if it is not claimed within the prescribed time.
Different icons can be used for demonstrating the conditions Raman must meet to receive Input Tax Credit (ITC).
Raman must have the necessary documents to claim ITC once he is eligible to claim. Below is a list of documents. These are the documents:
• A bill issued by the supplier for goods or services.
• Invoice from the recipient of goods and services in cases where supply was made by an unregistered individual to a registered person.
• Debit note issued to the supplier if the invoice’s taxable value is lower than the tax due or owing in respect thereof
• A Bill of Entry, or similar document, is required to implement a tax on imports.
• A credit note or invoice issued by an input service distributor in accordance with the GST rules.
• A Bill of Supply is issued by a dealer who opts for composition scheme, an exporter or supplier of exempt goods.
Different icons can also be used to show the conditions Raman must meet in order to claim Input Tax Credits (ITC).
Raman must remember that ITC claims can be reversed in certain situations. The next section can be opened with “But Hey! Raman Must Be Aware of Certain Scenarios Under GST Where ITC Claimed under GST Gets Reversed’. Raman should be aware of all these scenarios. Speak if
• The Supplier Is Not Paying Within 180 Days From the Date of Issue of the Invoice by the supplier
• Raman uses goods and services for personal use
• Raman uses goods and services for exempt supplies
• Raman uses capital goods for personal use
• Raman uses capital goods and plant and machinery to sell
• Raman switches from normal GST to composite levy
• Raman’s Registration Cancelled
• Raman can reverse ITC claims if he is one of the Input Service Distributors dealers.
• Raman claims ITC on inputs used for exempted or non-business purposes more than ITC reversed during the year
• Raman Reverses ITC on Inputs Used for Exempted or Other Purposes
Raman can now claim ITC to satisfy his output tax liability. See the table below under the Utilization ITC.
“Raman can extinguish CGST Liability first by using ITC under CGST, then under IGST. __S.230__ Finally, Raman can exhaust any IGST liability by using ITC standing in IGST, ITC existing under CGST, and finally the ITC standing in SGST.
Raman must reconcile the ITC claim. The process of ITC matching begins after the due dates have passed for GST returns. The ITC Matching process is carried out by the Goods and Services Tax Network’s online portal. All inward supply details, as per GSTR 2, are matched with the outward supplies as per GSTR 1, filed by the supplier.
Raman will claim valid ITC if the details match. If there is a mismatch in details, then Raman will claim ITC.
Raman may be refused ITC if he fails to pay tax by the due date. Raman’s tax liability will be increased if any ITC is claimed.