Input Tax Credit under GST: Everything that has changed

After sixteen years of discussions, debates and drafting, the government on July 1, 2017 finally implemented the Goods and Services Tax. There are so many sources of information listing out advantages and disadvantages of GST. However, before we learn the same, we need to understand why such a change in the tax regime was required. One of the key areas, which GST has impacted, is Input Tax Credit or ITC.

Input Tax Credit is not a new concept and it existed before GST also. However, ITC under VAT (Value Added Tax) was a different concept.

Input Tax Credit offers a lot of benefits. But, before moving on to its benefits it is important to understand its meaning.

Input Tax Credit: Meaning

Input tax is a charge on the supplies of inputs i.e., raw materials. It is imposed by the government on the person who receives such supplies of goods and services for business purpose.

Thus, ITC will be available to the supplier on the goods/services he intends to give for external supplies (for business purpose only). It does not include capital goods, i.e., goods used for producing other goods and not the ones which are sold directly to the customer.

VAT vs GST

The table below will clear the difference between ITC under VAT and GST. This shall enable us to understand the pre and post GST scenario with respect to ITC.

Let’s understand this by way of an illustration.

Pre-GST scenario:

A manufacturer buys raw material costing Rs. 100. This Rs. 100 includes both his cost and profit. Now he would add tax at 10% i.e., Rs.10 so that total cost prices for wholesaler be Rs. 110. Now the wholesaler would Rs. 40 as his profit that amounts to Rs. 150.

After this, the wholesaler would add tax at 10%, making Rs. 165 as the cost for the retailer.

Further, Rs. 165 calculated above will be the cost price for the retailer. The retailer will add Rs. 35 as his profit and it would amount to Rs. 200 (cost price plus profit of retailer).

Now the retailer would add 10% as tax on Rs. 200 i.e., Rs. 20. The consumer will finally pay Rs. 220. Here the respective tax paid by all parties is Rs. 10 (manufacturer) + Rs. 15 (wholesaler) + Rs. 20 (retailer), amounting to total tax of Rs. 45 which is borne by the customer.

Post-GST scenario:

Manufacturer buys raw material costing Rs. 100. This Rs. 100 includes both his cost and profit,. He would then add tax at 10% i.e., Rs. 10 making the total cost Rs. 110.

Now under GST, the wholesaler would purchase the material at sale price (and not the invoice price). Accordingly he will add the profit and taxes on that sale price.

This means that on purchase of goods worth Rs. 100, he will add profit of Rs. 40, amounting to Rs. 140. On this he would add tax at 10%, making the price as Rs. 154. It appears that the tax paid by wholesaler is Rs. 14 when in fact, the manufacturer had already paid Rs. 10.

Therefore the tax liability for manufacturer would be Rs. 14- Rs. 10 i.e., Rs. 4.

Similarly, now the cost price for retailer would be the sale price of the wholesaler i.e., Rs, 140 (and not Rs. 154).

Let’s assume the retailer marks up the price by Rs. 35, amounting to the sale price of Rs. 175.

On this, after adding 10% tax, the price would be 175 plus 17.5 which is equal to 192.5.

Here it appears that tax paid by retailer is Rs. 17.5 but actually manufacturer already paid Rs. 10 and wholesaler already paid Rs. 4.

So, actual tax liability for retailer would be Rs. 17.5- Rs. 10- Rs. 4 = Rs. 3.5. Here, the respective tax paid by all parties, is Rs. 10 (manufacturer) + Rs. 4(wholesaler) + Rs. 3.5 (retailer) amounting to total tax of Rs. 17.5.

A comparison with the above scenario shows that the tax liability is reduced from Rs. 45 to Rs. 17.5

This reduces the overall price for customer and tax liability for each party in the supply-chain.

Who can claim the ITC benefit?

1. For claiming the ITC benefit, the person/entity should be registered under GST. Here are some important points to know as to who is covered, who needs to apply to register under GST and who can claim ITC benefit.

2. All business persons (i.e., individuals, HUF , Company, Firm, LLP, Association of persons, Body of individuals, registered trusts, societies etc. are covered under GST.

3. Mandatory registration:

(a) If the turnover in a financial year exceeds Rs. 20 lacs. For NE states the limit is Rs.10 lacs.

(b) It is also mandatory for persons engaged in inter-state taxable supply, e-commerce operators, non-resident tax persons, agents, aggregators etc.

4. Anyone who applies for registration under the Act within 30 days on which he becomes liable to registration can avail the ITC benefit. This shall apply to both semi-finished or finished goods in stock on the day immediately preceding the date from which he becomes liable to pay tax.

5. A person/entity who has obtained voluntary registration under the Act will also get the same benefit (as point 4).

Conditions for claiming ITC

• It is important to produce the tax invoice or any other tax paying document issued by the registered dealer.
• The manufacturer/dealer should actually receive the goods/service.
• The supplier must have already paid the tax on inputs and furnished the GST return in that regard. (This is an interesting provision as it enables verification and authentication of the amount sought to be claimed as a credit.)
• The supplier should be paid the cost of goods/services and the applicable tax on it within 180 days from the date when the invoice was issued by him. Non-compliance with this provision will enhance the output tax liability. However, after the amount is paid, the recipient will be entitled to avail the credit. Even if the recipient has made partial payment, partial credit will be allowed.

Time limit for availing ITC

The last date to claim ITC is earlier of the following.

• September of the following Financial Year to which invoice of supplies concerns, or
• The date of filing annual return.

Can I Claim ITC on all Goods and Services?

No, ITC is not available for the following goods and services.

1. Motor vehicles unless used for purely commercial purpose.

2. Goods and services related to health and hygiene. This includes the following foods and services

• beverages
• services given by hospitals and parlors
• memberships of clubs, gyms and other recreational centers
• benefits extended to employees on vacation such as accommodation, travelling tickets etc.

3. Goods/services used and availed for solely private use.

4. Works contract services when supplied for construction of immovable property. There are some exceptions to this. For example, the contract should not be for plant & machinery. Moreover, it cannot relate to input service for further supply of works contract;

5. Goods or services received by a taxable person for construction of immovable property on his own account (personally), other than plant & machinery, even when used in course of business;

6. Goods and/or services falling under composition scheme;

7. In case the goods are lost, stolen, destroyed, written off, gifted, or given as free samples;

8. In cases of fraud, suppression, mis-declaration, seizure, detention when tax is paid to cover up the actual amount to be paid.

Thus, Input Tax Credit is a tool to encourage seamless flow of input credit. There are set guidelines for availing this benefit. It is a welcome move as it shall ensure the accountability of the suppliers to pay the required tax thus preventing the overall increase in the price. Moreover, there is a clear distinction between those who can avail this benefit as well as those who cannot.

This article is written by Sonal Goel. Sonal is a lawyer by profession and works at PocketLawyer.com as a content creator.

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