The meaning of ‘Input Tax Credit’ can be understood easily if we break the words ‘input’ and ‘tax credit’. Here ‘input’ is referred to the materials or services that a manufacturer/Supplier of services procures in order to manufacture a taxable product or to render a taxable service. The word ‘Tax credit’ means the tax paid on the purchase of inputs (goods to be used in taxable supply) which can be used to reduce the output tax (Tax to be paid on the supply of goods or services).

How ITC works?

When a producer/manufacturer/supplier of services pays the tax (output tax) on his output, he can set off the tax (input tax) he previously paid on the procurement of inputs.

ITC under GST On Supply of Goods & services.

How to Claim Input Tax Credit under GST?

Suppose a company named ABC Limited (a tyre manufacturer) registered under GST purchased 10 tons of rubber from a registered supplier named XYZ Limited (a rubber Company). Both the companies will reconcile their transactions respectively, and the recipient (ABC Limited in this case) will claim the input tax credit, as follows:

  • The Supplier (XYZ Limited) will furnish the GSTR 1 (Details regarding outward supply).
  • The details provided by the supplier (XYZ Limited) in the GSTR-1 will automatically fetch in the GSTR-2A of the recipient (ABC Limited). GSTR-2A will contain the details of inward supply which can be seen by XYZ limited.
  • ABC Limited then will verify the records and make the required changes/modifications/ additions (if any).
  • Once the changes are made by the recipient (ABC Limited), the modified information will be pulled automatically in GSTR-2. Subsequently, the correct credit of input tax will be credited to the electronic credit ledger.
  • Afterwards, the Supplier (XYZ Limited) can use Form GSTR-1A to view and accept the changes made by ABC Limited in the GSTR-2.
  • Finally, once XYZ Limited has filed the GSTR-3 (the monthly returns) and has paid tax accordingly, ABC Limited will be able to avail the credit of input tax.
  • In a case, where the input tax i.e. tax on purchases is higher than the output tax i.e. tax on sales, the excess input tax credit can be carried forward or can be claimed as refund.

Time Limit specified in Input Tax Credit Rules under GST

A registered person can claim Input Tax Credit in the stipulated time and prescribed manner. There can be different circumstances in which the credit of input can be claimed for stocks, finished goods or semi-finished goods.

Circumstances Details Day on which Input Tax Credit can be claimed for stock, Semi-finished Goods or Finished Goods (held on immediately preceding day)
1 Where a person is liable to get registered under GST, or applied for registration within the prescribed time The day on which he becomes liable to pay GST
2 Where a person opts for voluntary registration The date of registration
3 A registered person who switches to normal provisions from  composition levy scheme The day from which he becomes liable to tax normally

Other conditions

Input Tax Credit mentioned in above circumstances can be claimed within 1 year only. The date is to be reckoned from the date of issue of invoice. However, in any other case, the last date for claiming Input Tax Credit is earlier of the two below:

  • Before the filing of the annual return
  • Before filing September month’s return following the end of Financial Year to which such invoice is related

Checkout the Last Date To File Income Tax Return

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Qualification: CA in Job / Business
Company: Taxguru Consultancy / Taxguru Edu
Location: Mumbai, Maharashtra, India
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June 2021