Input Tax Credit commonly known as ITC is the tax that a registered taxpayer pays on procuring goods or services or both and the same can be utilized in order to reduce its tax liability. In simple words, a registered person can reduce the future tax liability by claiming the input tax credit to the extent of tax paid on goods/service procured.

The GST tax mechanism is an integrated one where every purchase made by a registered person should be matched with a sale by another registered person. This integrated mechanism makes the flow of input tax credit across an entire supply chain a seamless process.

The concept of input tax credit isn’t a new one, it was there in the Pre-GST regime (service tax, VAT and excise duty) as well. Now the same concept is being introduced under GST.

Input Tax Credit under GST with example: Mr. A of Delhi purchased certain goods valuing Rs. 1,00,000 and paid GST @ 18% (9% CGST and 9% SGST). He sold such goods at Rs.1,20,000 which attracts GST @ @ 18% (9% CGST and 9% SGST).

The Input Tax Credit standing in his credit is Rs. 18,000 (9% CGST and 9% SGST of Rs.1,00,000). GST payable on goods supplied is Rs.21,600 (9% CGST and 9% SGST of Rs.1,20,000).

Tax to be paid by Mr. A is Rs. 3,600 (21,600-18,000)

Input Tax Credit is not available in certain cases (Block Credits) under the Input Tax Credit Rules, some of them is as below:

  • Purchase of motor vehicles and other conveyances (except under specified situations)
  • Outdoor catering, food and beverages, health services, beauty treatment, cosmetic and plastic surgery (except under specified circumstances);
  • Health and fitness centre or Membership of a club,
  • Life insurance, health insurance, Rent-a-cab facility except where it is obligatory by the government for an employer under any law;
  • Travel benefits provided to employees (leave or home travel concession);
  • Services of Works contract in relation to the supply of goods and service for construction of immovable property (other than plant & machinery) except in certain circumstances,
  • Where Goods or services procured by a registered person own his own account for construction of immovable property (other than plant & machinery,
  • Goods or services or both on which composition levy is applicable;
  • Goods or services or both used for personal consumption
  • Goods stolen or lost, gifted, written off, destroyed, supplied as  free samples;
  • Any tax short paid not paid on account of fraud, suppression of fact, mis-declaration, seizure, detention.

Key Terms of input tax credit rules under GST

Input: Input implies any goods used or intended to be used by a supplier in the course or furtherance of business. However, input goods exclude any kind of capital goods.

Input Service: Input service implies any service used by a supplier in the course or furtherance of his business.

Input Tax: Input tax implies tax charged (whether CGST, SGST, IGST or UTGST) on any supply of goods or services or both made to the registered person. However, it’s important to understand that Input tax does not include any tax paid under the Composition Scheme.

Electronic Credit Ledger: Electronic Credit Ledger is just like a passbook which contains all the credits of a registered taxable person have accumulated and the same is maintained on the common portal.

Electronic Cash Ledger: Electronic Cash Ledger is similar to a passbook which comprises all the taxes paid by a registered taxable person and is maintained at the common portal.

We will discuss in our next articles Input Tax Credit under GST – How to Claim and Related Rules,  Input Credit under GST – Explained with examples and input tax credit under on supply of Goods or Services.

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Location: Mumbai, Maharashtra, India
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  1. PRABHAKAR JP says:

    THANKS for the useful article on ITC under GST. Your next article on the said subject is awaited. Please also highlight on the Admissibility of ITC on RCM paid, Registrants’ Gift to staff, Official conveyance through Cab / Taxi or by other modes, Hotel accommodation and Food used by official staff and / or client, Stationery, Computer / AC and its accessories etc. etc.. Regards

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June 2021