Input Tax Credit (ITC) is a crucial mechanism in GST, allowing businesses to offset taxes paid on purchases against their GST liability on sales. This article explores the definition of ITC, its types, eligibility criteria, and recent updates under GST law.
Input tax credit ‘ or ITC means the goods and services tax (GST) paid by a taxable person on any purchase of goods and services that are used or will be used for business.
Section 2(62) defines the CGST Act ‘input tax ‘
Input tax means the central tax (CGST), state tax (SGST), integrated tax (IGST), or union territory tax (UTGST)charged on the supply of goods or/and services made to a registered person.
- It also includes tax paid on
- reverse charge basis and
- Integrated tax charged on import of goods.
- It does not include tax paid under composition levy.
According to section 2(56) of CGST “input tax credit “means credit of ‘input tax’.
- GST which is paid at the purchase when reduced from liability payable on outward supplies is known as input tax credit.
- means at the time of paying tax on output, you can reduce the tax you have already paid on input and pay the balance amount.
- In other words businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.
EXAMPLE :
- X a trader purchases a good worth Rs.1000 and pays a tax of 10% on it i.e Rs.100
- X sold such goods at Rs.1500 and collected tax of Rs. 150 from bua already paid Rs.100,
- so this Rs.100 is the ITC of the trader M X
- and will be allowed as a deduction from tax payable
- outward GST payable 150
- less: Input tax (GST paid on purchase)100
- he has to pay net Rs.50 as tax GST (GST payable)
ITC value can be reduced from the GST payable on the sales by the taxable person only after fulfilling a few conditions. These conditions are mention under the GST law are more or less in line with the pre-GST regime, except for a few additional ones such as GSTR-2B. These rules are direct and maybe stringent in nature.
Eligibility & conditions for availing ITC
- 9 Chapter V (sec 16-21) of the CGST act, and rules.
- These provisions of ITC under CGST are also applicable to the IGST act (sec20 of the IGST act has made provision and is applicable )
- Section 16 Eligibility & condition for taking ITC
- Section 17 apportionment of credit & blocked credit
As per sec 16(1)
- Every registered person shall, subject to such conditions and restrictions as may be prescribed and
- In the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both
- To him which are used or intended to be used in the course of furtherance of business and
- The said amount shall be credited to the electronic credit ledger of such person.
Analysis of sec 16(1) statutory provision reveals the following:
1. Registered person
2. ITC is available only to a registered person.
3. In the course of or in furtherance of business
The goods/services must be used or intended to be used in the course of or in furtherance of his business.
Credit ledger
The amount of ITC shall be credited to the electronic credit ledger of the person entitled.
Manner of utilization
The restriction on utilization 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/UGST.
CGST credit,
- it is to be utilized against CGST and
- then balance with IGST.
SGST credit,
- it can be utilized to set off for SGST/UTGST,and
- then the balance for IGST is payable.
As per section 16(2)
- No registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless.
- In other words we can say the registered person is entitled to the credit of any ITC on a supply only if all the following conditions are fulfilled:
- possession of a tax Invoice or Debit Note
- The recipient must have received the goods or services.
- The tax charged in respect of such supply has been actually paid to the government.
- Furnishing the valid return under sec39.
TYPES OF INPUT TAX CREDIT UNDER GST
The input tax credits are of three types under GST are as followed ;
1. inputs
2. capital goods
- input services
- Inputs
Tax on goods purchased is called inputs. These goods may be for purchase for sale by shopkeeper or purchase for use (example – stationary )
*capital goods
It means those goods which are capitalized in books (treated as fixed assets) These are intended to be used for more than 1 year Example – machine, computer.
*Input services
It means a purchase of various services like telephone, internet, etc.
Question
A company made the following expenses purchase of goods 40000+2000 GST laptop purchase 50000+6000 GST office files purchased 2000+1000 GST audit fees =50000+9000 GST sale of goods =100000+5000 GST
what is ITC of inputs, capital goods, and inputs services
Answer
| Output GST | 5000 |
| ITC on Inputs | 3000 |
| ITC on Capital Goods | 6000 |
| ITC on Input Services | 9000 |
| Total ITC | 18000 |
| GST Payable | 0 |
| GST Credit (Closing ITC) | 13000 |
latest updates
1st February 2023 budget 2023 updates*
1. Section 16 is amended to state that buyers who fail to pay their supplier the invoice value, including GST amount, within 180 days from the date of issue of the invoice, must pay an amount equal to ITC claimed along with interest under section 50.
2. Sections 37,39,44, and 52 are amended to restrict taxpayers from filling their GSTR -1, GSTR-3B, GSTR-9, and GSTR-8 for a tax period after the expiry of three years from the due date.
3. Section 17(5) is revised to include another item under ineligible ITC being expenditure on CSR initiatives for co-operators.
High sea sales and similar transactions that are similar transactions that are neither supply of goods or services are considered exempt and hence ITC proportional to such sales cannot be claimed as per revised section 17 (3).
Schedule III has been amended to provide for paras (7) and (8) and explanation (2) to take retrospective effect from 1st July 2017.
Section 10 of the CGST Act has been amended to allow businesses that supply goods through an e-commerce operator to opt into the composition scheme.
What is GSTR 2A and GSTR2B ?
GSTR-2A is an auto-populated read-only document that provides a comprehensive view of purchases made. on the other hand, GSTR-2B is a summarized view of input tax credit available to taxpayers for a particular tax period, generated by the GST portal.
- Is GSTR 2B mandatory?
limit in ITC availment under rule n36(4)-The purpose of GSTTR-2B is ensure compliance with rule 36(4). once GSTR 2B is made mandatory, availing of ITC by a taxpayer for invoices not uploaded by vendors cannot exceed by more than 10%, the input tax credit for invoices uploaded by the vendor in their GSTR 1 return 2.
- GST rule for input tax credit
ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from these, there are certain other situations where ITC will be reversed.
Who can claim ITC?
ITC can be claimed by a person registered under GST only if he fulfils.
All the conditions as prescribed :
1. The dealer should be in possession of the tax invoice.
2. The said goods/services have been received.
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. When goods are received in installments ITC can be claimed only when last lot is received.
6. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good.
A person registered under the composition scheme in GST cannot claim ITC.
What can be claimed as ITC for?
ITC can be claimed only for business purposes. ITC will not be available for goods and
1. Personal use.
- Supplies for which ITC is specifically not available.
- Exempt supplies.
How does GST input credit work?
At each stage of the supply chain, the buyer gets credit for the input tax paid, and they can use it to offset the GST that needs to be paid to the center and state governments.
Can we take a refund of ITC in GST?
However, the GST law permits refund of unutilized ITC in two scenarios, namely if such credit accumulation is on account of zero-rated supplies or an account of inverted duty structure, subject to certain exceptions.
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