Input tax credit implies that you can deduct the tax you have already paid on inputs from the tax to be paid on outputs. The scope of input tax credit post-GST has widened. Here, we shall discuss all about ITC (Input Tax Credit), its time limit as well as how to calculate and claim ITC.
Input Tax Credit under GST
Earlier, it was impossible to claim ITC for central sales tax, luxury tax, and entry tax and other taxes. Even the manufacturers and service providers were unable to claim central excise duty. However, post-GST all the taxes have merged into one tax and the complications earlier are now more comfortable than before.
Under the IGST Act, input tax is defined as IGST, CGST or SGST charged on the supply of goods and services.
Example of ITC
Let us assume a manufacturer pays tax on input or purchases of raw materials Rs. 100, Rs. 130 & Rs. 70 respectively. On the final product or output, the total tax payable is Rs. 400. Thus here, he can claim ITC (Input Tax Credit) of Rs. 300 and has to pay only the difference, i.e., Rs. 100.
Remember that, not all types of input are eligible for ITC. Every state or a country may have different rules & regulations.
In a case where the tax on inputs is more than the tax on output, you can carry forward input tax or can claim a refund. In a case where the tax on input is less than the tax on outputs, you have to pay the remaining tax. The government will not pay any interest on input tax balance.
Types of Taxes under GST
GST is divided into two main categories.
1. For Intra-State Movement:
- Central GST (CGST):
– to pay CGST, take ITC from CGST & IGST paid on purchases.
- State GST (SGST):
– to pay SGST, take ITC from SGST and IGST paid on purchases.
2. For Inter-State Movement:
- Integrated GST (IGST):
– to pay IGST, take ITC from IGST, CGST & SGST paid on purchases.
Time Limit to Avail ITC under GST
Any registered taxable person can avail the benefit of ITC within a specified time in a specified manner. However, he must satisfy the below-mentioned conditions for claiming ITC benefit.
- He must possess tax invoice or debit note or any other note giving the evidence of tax payment.
- He must have received the goods or services or both, as the case may be.
- The supplier has filed the GST return.
- The supplier has already paid the tax charged in respect of the supply to the government.
This means that you can claim ITC only if your supplier has deposited the tax collected from you to the government.
Note: The taxpayer can still avail the benefit of ITC, even without the payment of tax in an invoice, provided he pays the consideration along with the tax within 180 days from the date of issue of the invoice. However, this condition will not apply where the tax is payable on a reverse charge basis.
Under the Revised Model GST Law, the ITC on capital goods is allowed in one installment except in respect of pipelines and telecommunication towers fixed to earth by the foundation or structural support including foundation and structural support to that.
ITC Claims day for semi-furnished goods/stock/finished goods (held on immediate preceding day)
Where a person has applied for registration or is liable to register or is granted registration.
Day from when he is liable to pay taxes
Where a person takes voluntary registration.
When a taxable registered person stops paying taxes in composition levy scheme.
Day from when he is liable to pay tax normally U/S 7
You can claim ITC benefit for the above situations only if it does not exceed one year from the tax invoice date of issue related to supply.
The maximum time limit to claim the input tax credit in respect to any goods or services is the earliest of the following:
- Furnishing of the relevant annual return.
- Filing of the return U/S 34 for September, following the end of FY to which such invoice or invoice related to such debit note pertains.
- You cannot avail the benefit of ITC on purchase invoices more than one-year-old. Here, the time is calculated from the date of the tax invoice.
- You cannot avail the benefit of ITC on goods and services for personal use.
- Input tax credit can be availed on both goods & services, except those which are on the exempted list.
- You cannot obtain the benefit of ITC on goods stolen, lost, destroyed or written off as well we on goods given as free samples and gift.
- No ITC shall be allowed after GST return has been filed for September following the end of the FY to which such invoice pertains or filling of relevant annual return, whichever is earlier.
Negative List on which ITC is not permitted
Section 17 (4), provides for the negative list concerning the admissibility of ITC. You cannot avail the benefit of ITC on following items.
- Motor vehicles, except where they are supplied in the normal course of business or are used for providing the following taxable services
(i) Transportation of passengers, or
(ii) Transportation of goods, or
(iii) Giving training on motor driving skills;
- Goods and / or services provided in relation to food & beverages, health services, outdoor catering, beauty treatment, cosmetic & plastic surgery, health and fitness center, membership of a club, life insurance, health insurance and travel benefits extended to employees on holiday such as leave or home travel concession, when such goods and/ or services are used primarily for personal use or consumption of any employee;
- Goods and/or services used for private or personal purposes, to the extent they are so consumed.
- Any Goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
- Goods and/or services on which tax is already paid under section 8; and
- Goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery.
How to calculate Input Tax Credit
Let’s consider you have a business. The service or product you sell draws 18% tax. You use input services or goods during your business. The tax payable by you (of 18%) can be adjusted to the taxes already paid by you on buying of such inputs. The manufacturers add taxes only for the value addition made & not on the whole product value.
Suppose a steel utensils manufacturer who manufactures utensils like spoons, plates, etc. had bought the raw steel worth Rs. 1000 to make a pressure cooker and Rs. 200 worth other raw materials. Let’s assume that the GST for steel is 18% and the GST he paid is 28% of other raw materials.
Here, the manufacturer has paid Rs. 56 on other raw materials and Rs. 180 on raw steel which he used as inputs. So, the total input tax paid is Rs. 236 by the manufacturer. Now, after analyzing the cost of producing steel pressure cooker using the raw materials & including a decent profit, he chose to sell the pressure cooker to a distributor at Rs. 1600 + GST.
Suppose the steel utensils attracts a GST of 18%. Now the tax on it will be Rs. 288. So the manufacturer will invoice the pressure cooker for Rs. 1888. Hence, the manufacturer is collecting Rs. 288 as GST on sale from the distributor. The manufacturer had paid Rs. 236 towards GST during the buying of his input raw materials. Hence, out of Rs. 288 of GST, the manufacturer, can now claim a credit of Rs. 236 which he has already paid towards GST for inputs & can deposit the difference of Rs. 52 with the government.
This tax credit is possible at all succeeding stages, and retailers & distributors can charge GST & can claim the Input Tax Credit.
How to claim Input Tax Credit (ITC)
The following conditions must be satisfied for claiming Input Tax Credit under the GST scheme:
- An assessee must be a registered taxable person.
- For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
- An assessee can claim ITC only if the goods & services received by him is used for business purposes.
- If there is an actual receipt of goods & services, only then an Input Tax Credit can be claimed.
- All GST returns u/s 27 such as GST-1, 2, 2A, 6, 6A, 7, 7A needs to be filed.
- Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
- The Input Tax should be paid through Electronic Credit/Cash ledger.
- One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
- Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
- During bulk receipt of goods, one can claim Input Tax Credit only once the final lot is received.