In this guide, we will go through the following aspects of the Input Tax Credit(ITC):
- What is Input Tax Credit?
- Who can claim Input tax credit?
- What can be claimed as ITC?
- What are the documents required for claiming ITC?
- What are the special cases for ITC?
- The reversal of ITC.
- The reconciliation of ITC.
Let's begin our guide.
What is Input Tax Credit(ITC)?
Input credit means at the time of paying tax on output, one can reduce the tax they have already paid on inputs. Let's take a small example to see how it works-
If you are a manufacturer and the tax payable on output (final product) is Rs 500, while the tax paid on the input (purchases) is Rs 300.
You as the manufacturer will be able to claim an input credit of Rs 300 and would need to deposit the amount of Rs, 200 in taxes.
Who can claim Input Tax Credit?
Any dealer registered under the Goods and Service Tax will be able to claim an Input Tax Credit if he/she fullfills all of the below conditions:
- The dealer should be in possession of his tax invoice.
- The goods/services that are mentioned have been received
- The returns have been filed.
- The supplier has paid the tax charged to the government.
- In the case when the goods are received in multiple instalments the ITC can be claimed only when the final instalment is received.
- No ITC will be allowed if depreciation has been claimed on tax component of a capital good.
What can be claimed as ITC?
Input Tax Credit(ITC) can be claimed only for business purposes only. ITC will not be available for the following:
a. Personal Use.
b. Exempt supplies.
c. Supplies for which ITC is specifically not available.
What are the documents required for claiming ITC?
Listed below are the documents which are required for claiming ITC:
- Supplier issued invoice for supplying the services and goods or both.
- A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
- Bill of entry.
- A credit note or invoice which is to be issued by the Input Service Distributor(ISD) according to the GST invoice rules.
- An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law.
- A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.
What are the special cases for ITC?
ITC for Capital Goods
When capital goods are used exclusively for business purpose, input tax credit is available under GST. “Capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
ITC on Job Work
A principal manufacturer may send goods for further processing to a job worker.
For example, a pen manufacturing company sends partially made pens (without caps) to job workers who will make and fit the caps.
In such a situation the principal manufacturer will be allowed to take credit of tax paid on the purchase of the goods sent on job work.
ITC will be allowed when goods are sent to job worker in the following two cases:
- From principal’s place of business.
- Directly from the place of the supplier of such goods.
ITC Provided by Input Service Distributors (ISDs)
An Input Service Distributor (ISD) means an office of the supplier of goods or services or both which receives tax invoices towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of Central tax (CGST), State tax (SGST)/ Union territory tax (UTGST) or Integrated tax (IGST) paid on the supplied goods or service.
ITC On Business Transfers
In the case of acquisitions, mergers or amalgamations of business, the transferor will have available input tax credit which will be passed to the transferee at the time of the above-mentioned situation.
The reversal of ITC.
If Input Tax Credit is availed for non-business(personal) purposes, or for making exempt supplies, it will be reversed.
Other than that, there are several cases when the ITC will be reversed.
- ITC will be reversed for invoices that are not paid within 180 days of issue.
- If a credit note was issued by the seller to the Head Office then the reduced ITC will be reversed. This is specifically for Input Service Distributers(ISDs)
- For businesses which use inputs for both business and non-business (personal) purpose, ITC used in the portion of the personal purpose must be reversed proportionately.
- If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year, then the difference amount will be added to output liability.
The Reconciliation of ITC
ITC claimed by the dealer has to match with the details furnished by his supplier in his GST return. In case of any mismatch in the details that are specified by the supplier in the GST return, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR-3.