Input Tax Credit plays a valuable role in making the Goods and Service Tax a fair & transparent structure. Although it is important, it is pretty confusing to understand.
This article will guide you through the complete information you need to know for availing of maximum Input Tax Credit.
Even if you are new to the tax system, do not worry, e have got you covered in this article.
Stick till the end to learn more.
What is Input Tax Credit?
Input Tax Credit is one of the important parts of the Goods and Service Tax structure. Hence, knowing the basic facts about this concept is necessary.
To explain you in simple terms, Input Tax Credit or ITC can be understood as follows:
A purchaser pays tax on any goods (other than capital goods) & services to be used by him in the course or furtherance of his business. He has paid this tax as an Input tax.
Now, the same purchaser while paying his Output Tax (I.e. his GST Returns filings to the Government), can reduce the tax he has already paid on inputs & pay the balance amount as GST Returns.
Input Tax Credit, though difficult to implement, but is one of the most important features of the Goods and Services Tax. ITC has helped in eliminating the cascading effect (tax on tax effect) from the taxation system in India.
The picture will be clearer when we understand this concept with an applied example.
Input Tax Credit – How it functions?
Input Tax Credit under GST is a complicated process to be explained theoretically; hence we will try to apply these concepts in a practical example to understand it more simply.
Consider 3 entities:
- Mukesh Bhai (The Supplier)
- Mota Bhai (The retailer)
|Mukesh Bhai (Wholesale Supplier)|
|Supplies Goods to Mota Bhai||Rs.1,00,000 (Received)|
|Collects GST (18%)||Rs.18,000 (Received)|
|Total invoice value||Rs.1,18,000 (Received)|
|Total Ta collected from Mota Bhai||Rs.18,000|
|Total Tax Paid to Government||Rs.18,000|
|Direct incidence of tax||Nil (paid as received from retailer)|
Now let’s see the details from the retailer’s side:
The retailer will now sell the goods further to the end-user (consumer)
|Mota Bhai (Retailer)|
|Value of Goods (With Profit included)||Rs.1,20,000|
|Collects GST (18%)||Rs.21,600|
|Total invoice value||Rs.1,41,600|
|Total Tax collected from Consumer||Rs.21,600|
|Tax Paid to Mukesh Bhai||Rs.18,000|
|Tax Paid to the Government||Rs.3,600|
|Direct incidence of tax||Rs.3,600|
Now, let us see the impact of this chain on the end-user i.e. the consumer:
|Common Man ( Consumer )|
|Value of goods (paid to the retailer)||Rs.1,20,000|
|GST Paid (18%)||Rs.21,600|
|Total invoice value||Rs.1,41,600|
|Total Tax paid to the retailer||Rs.21,600|
|Direct incidence of tax||Rs.21,600|
From this example, we understand that,
- Mukeshbhai (Supplier) collects a GST of Rs.18,000 from Mota Bhai (Retailer) & pays this complete sum to the Government as the GST return.
- Now, Mota Bhai collects 21,600 from the Consumer as GST. Out of this, he pays only Rs.3, 600 to the Government. The balance amount i.e. Rs.18,000 is deducted from the GST to be given to the Govt. This happens because Mota Bhai had already paid a GST of Rs.18, 000 on his input & hence he can claim an Input Tax Credit of Rs.18,000.
- Now, we can understand that the complete tax incidence falls upon the consumer whereas the intermediate parties can set off against their respective tax liabilities on the output.
This is how the whole chain of the Input Tax Credit works.
ITC is a very important part of the GST structure and has been proved to be very effective in eliminating the cascading taxes effect since its inception.
Eligibility and Conditions to avail ITC
There are some fundamental pre-requisites to claim Input Tax Credit GST . We have listed them as follows:
- The person claiming ITC should be a registered taxpayer under Goods & Service Tax.
- Goods or services or both must have been received.
- A tax invoice/debit note mentioning the tax amount.
- The supplier must have paid the tax to the government on the buyer’s purchases. This can be in the form of either filing returns in cash or by claiming the Input Tax Credit.
Budget 2021 Update on ITC Eligibility:
There is an insertion of a new clause (aa) in Subsection (2) (conditions to satisfy for taking the ITC benefit) of Section 16 of the CGST Act.
- Input Tax Credit on invoice or debit note can be availed ONLY when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.
- In case of failure of either of the prescribed actions, the registered person will not be entitled to avail the credit on the Input tax for that particular invoice or debit note.
What can make you Ineligible to claim ITC?
You will be ineligible to claim Input Tax Credit in the following cases:
- For purchases where the buyer needs to pay taxes on the reverse charge basis.
- For the composition dealers.
- On purchases of goods for non-business purposes.
- Purchase of capital goods used for manufacturing exempted goods.
- In the case of ‘Blocked Credits’ (w.r.t. Section 17(5)).
Documents required for claiming Input Tax Credit
To avail maximum Input Tax Credit, some documents are mandatory to be established.
Following is the list of all the required documents to avail maximum Input Tax Credit.
- A tax invoice issued by a registered supplier.
- A debit note is issued about the tax invoice issued by the registered supplier.
- An invoice issued by the recipient of goods or services who has paid tax under Reverse Charge Mechanism (RCM).
- An invoice or credit note issued by an Input Service Distributor.
- A bill of entry or similar document in case of imports.
Reversal of Input Tax Credit
In certain cases, the Input Tax Credit has to be reversed.
There are multiple cases where you may be required to do so. Let us see the list below:
- If goods & services are used for personal consumption.
- Failure in paying your supplier within 180 days from the date of issue of the invoice.
- Moving from normal GST taxpayer to the composition scheme.
- Utilizing goods & services for manufacturing of the exempted supplies.
- For the sale of capital goods or plant and machinery on which input tax credit was claimed.
- Cancellation of your GST Registration.
- If the reversed ITC exceeds the ITC on inputs used for a non-business purpose.
The reversed amount in this process will be added to the output tax liability in the month in which it was reversed. Interest will be paid from the date of availing credit till the date when the amount is reversed & paid.
Important Reconciliation to avail max Input Tax Credit
Keeping a track of all the records flawlessly is a tough job. But this is what the practice of Input Tax Credit in the GST structure demands.
All the records of your vendors must be maintained & must be furnished as required while availing of your Input Tax Credit GST.
Availing 100% of your eligible ITC is a right of every honest taxpayer & that’s why reconciliation of the records becomes important.
Any difference which occurs during filing either by you or your supplier may cause blocking of your ITC under GST. Also, claiming any ineligible ITC due to errors in the entries of both parties can attract heavy penalties from the Government.
GSTR2A vs. ITC Reconciliation
Reconciliation of GSTR-2A is an important step towards claiming maximum ITC.
Why should you reconcile your GSTR-2A?
- To ensure that the ITC is correctly claimed by the company and there is no dubious transaction involved.
- To protect your company from the risk of a reversal of ITC, levy of interest, and penalty by the government.
- To keep a check on the misuse of the GSTIN of the company.
Let us take the help of an example to understand this:
(Input Tax Credit with example)
Consider two transacting entities.
- Sony Traders (Supplier)
- Jethalal electronics (Purchaser)
There is a transaction between these two entities for Rs.3,00,000
Purchaser pays the Supplier Rs.3,00,000 + Rs.80,000 (GST)
In total, the Purchaser pays = Rs.3,80,000
In simple terms, it means that Jethalal Electronics, the Purchaser has paid a GST of Rs. 80,000.
But, instead of paying directly to the Government, the purchaser has handed it over to the Supplier i.e. Sony Traders.
Now, the supplier Sony Traders is entitled to pay this amount of Rs.80,000 to the Government.
When the Supplier will file a return in GSTR-1 of Rs.80,000 to the GST Portal, only then will it get reflected in the FORM GSTR-2A of the Purchaser (Jethalal Electronics).
When this figure of 80,000 gets reflected in the GSTR-2A of the Purchaser, only then this Input Tax Credit will be available to the Purchaser.
While managing multiple vendors & thousands of invoices at a time, errors are more likely to be introduced in the records.
Understand the scenario for one such mismatch explained below:
Look at the following tables:
Table 1: For the Purchaser, Jethalal Electronics:
|Transaction amount as per books of accounts||3,80,000|
|GST paid as per books of accounts||80,000|
|Total ITC available as per books of accounts||80,000|
|Total ITC available as per GSTR-2A||65,000|
Now, why is there a difference in the ITC available based on the books of accounts of the purchaser and the one shown in the FORM GSTR-2A?
Before answering this question let’s have a look at the entries from the Supplier’s side.
Table 2: For the Supplier, Sony Traders:
|Transaction amount with Jethalal Electronics as per books of accounts||3,80,000|
|GST received from Jethalal Electronics||65,000|
|GSTR filed in GSTR-1 for this transaction with Jethalal Electronics||65,000|
From Table1 & Table 2 it is evident that an error has been introduced by the accountant of the Suppler while filing the returns.
This error will have further implications on the eligible Input Tax Credit of the Purchaser.
To avoid such mismatches it is advised that you should reconcile your GSTR-2A records using a professional Reconciliation Tool.
Provisional Input Tax Credit
Provisional Input Tax Credit is a relief provided by the Government to the taxpayers.
We will try to understand this concept with an example in this segment.
The Central Board of Indirect Taxes and Customs (CBIC) recently revised the extent of provisional input tax credit claims from 10% to 5%, with effect from 1 Jan 2021.
Rule 36(4) about Provisional ITC
According to the recently added sub-rule (4) in Rule 36 of the Central Goods and Service Tax Rules, 2017, a taxpayer filing GSTR-3B can claim provisional Input Tax Credit (ITC) NOT Exceeding 5% of the eligible credit available in GSTR-2A.
Assume a firm, Royal sports. Following are its details for November 2020:
|Sr. No.||Particulars||Amount (In Rs.)|
|1.||Total Input tax credit available as per books of accounts||50,000|
|2.||Total input tax credit available as per GSTR 2A||38,000|
|3.||Provisional credit available – 05% (05% of 38,000)||1900|
|4.||The Total input tax credit that can be availed (2+3)||39,900|
|5.||The input tax credit that cannot be availed (1-4)||10,100|
The total GST input tax credit available as per books of accounts is Rs 50,000 whereas as per GSTR 2A is Rs. 38,000.
Input tax credit not uploaded by supplier Rs. 12,000.
Note – Input Tax Credit as per GSTR 2A and provisional credit should NOT exceed total Input Tax Credit available as per books of accounts.
GST Input Tax Credit Rules
Any practice is fair only when there are certain rules it abides by.
Similarly, to make use of ITC in an effective way, there are certain Input Tax Credit rules that all taxpayers should keep in mind.
- The 180-day Rule
It simply means that buyer of the goods who is claiming the Input Tax Credit must make the complete payment to the supplier within 180 days from the date of supply to claim ITC. Failure to do so will cause the credit availed to be added to the outward tax liability of the buyer
- ITC on Capital Goods
You are not allowed to claim ITC on capital goods if you have already claimed depreciation on those capital goods.
- Document Requirement
As discussed in the document section of this article, you must possess all the necessary documents and you should be able to present them on demand.
- ITC claimed on Import Goods
To successfully claim ITC on the import goods you must be able to submit the Bill of Entry and the IGST payment challan.
- Taxes to be deposited to the Government
You must ensure that the GST that you have paid to the supplier reaches the Government via GST returns.
If the tax doesn’t reach the Government, you may not be eligible to avail 100% Input Tax Credit.
Until the next time…
About the Author–
GSTHero is the best GST filing, e-Way Bill Generation & E-Invoicing Software in India. GSTHero is a government-authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9, and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation & report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero.
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