GST Input Tax Credit (ITC): Conditions To Claim ITC, Rules of ITC

1. Understanding the Basics of Input Tax Credit (ITC):

Definition: Input Tax Credit (ITC) represents the credit of input taxes (GST paid on purchases of goods and/or services) that a registered taxpayer can utilize to offset their output tax liability (GST payable on the supply of goods and/or services).

Objective: The primary objective of the ITC mechanism is to prevent the cascading effect of taxes, ensuring that tax is levied only on the value addition at each stage of the supply chain, ultimately benefiting both businesses and consumers.

Eligibility: Generally, any person registered under GST who is engaged in making taxable supplies is eligible to claim ITC on goods or services used or intended to be used in the course or furtherance of their business, subject to fulfilling specific conditions and not falling under the list of blocked credits.

2. Who Can Claim Input Tax Credit (ITC)?

A registered person under GST is eligible to claim ITC, provided they meet the stipulated conditions. This encompasses a wide range of taxable persons, including manufacturers, service providers, traders, e-commerce operators, and aggregators.

However, certain categories of registered persons, such as those who have opted for the composition scheme, are generally not entitled to claim ITC.

3. Key Conditions for Claiming Input Tax Credit (ITC) under GST (Detailed):

To successfully claim ITC, a registered person must satisfy all the following conditions:

Possession of a Valid Tax Invoice or Debit Note:

The claimant must possess a valid tax invoice issued by a registered supplier, conforming to the rules specified under the GST Act. This invoice must contain all the prescribed particulars, including the GSTIN of both the supplier and the recipient, a clear description of the goods or services, the taxable value, the applicable GST rates (CGST, SGST/UTGST, IGST), and the amount of tax charged.

A debit note issued by the supplier for an increase in the taxable value or tax charged in the original invoice is also a valid document for claiming ITC.

Other documents, such as supplementary invoices, bills of entry (for imported goods), and invoices issued by Input Service Distributors (ISDs), may also be considered valid documents for claiming ITC under specific circumstances.

Receipt of Goods or Services:

The registered person must have actually received the goods or services (or both).

For goods, this implies physical receipt at their premises or deemed receipt, where the goods are delivered to a third person on the direction of the registered person.

For services, receipt signifies the completion of the service as per the agreement or contract.

In cases where goods are received in lots or installments, ITC can be claimed only upon the receipt of the last lot or installment.

Payment Made to the Supplier:

The recipient of the goods or services must have made the payment to the supplier for the value of the supply, including the tax amount.

This payment should be made within 180 days from the date of the invoice.

Failure to make the payment within this period necessitates the reversal of the ITC already claimed, along with the payment of interest.

Once the payment is made to the supplier, the ITC can be reclaimed.

Filing of GST Returns and Invoice Matching with GSTR-2B:

Both the registered person claiming the ITC and the registered supplier making the supply must have filed their respective GST returns.

The claimant must have filed their GSTR-3B, and the supplier must have filed their GSTR-1.

The details of the invoices on which ITC is being claimed must be uploaded by the supplier in their GSTR-1.

These details will then auto-populate in the recipient’s GSTR-2B. It is crucial for the recipient to reconcile their purchase records with the information available in GSTR-2B to ensure the validity of the ITC claim.

Provisional ITC claims are no longer permitted under the current GST regulations.

Tax Paid by the Supplier to the Government:

The tax charged by the supplier on the goods or services must have been actually paid to the government by the supplier, either in cash or by utilizing their own input tax credit.

This condition is essential to prevent fraudulent ITC claims and ensure the integrity of the GST system.

No Restriction on Claiming ITC (Blocked Credits under Section 17(5)):

Input Tax Credit shall not be available in respect of the following:

Motor vehicles with a seating capacity of less than or equal to 13 persons (including the driver), goods transport agencies, vessels, and aircraft, except for a few specific cases where ITC is allowed:

• Such motor vehicles and conveyances are further supplied (i.e., sold).
• Transport of passengers and goods.
• Conveyance is used for imparting training on driving, flying, and navigating such vehicles or conveyances.
• Services of general insurance, servicing, repair, and maintenance relating to motor vehicles, vessels, or aircraft mentioned above.

Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. However, if these goods and/or services are used to deliver the same category of services or as part of a composite supply, the input tax credit will be available.

Example: A beauty salon purchasing cosmetic creams for providing beauty treatment services can claim ITC on the creams.

Membership in a club, health, and fitness center.

Rent-a-cab, health insurance, and life insurance, except in cases where it is obligatory for an employer to provide them to their employees by law (e.g., mandatory cab services for female staff during night shifts) or where these services are used to deliver the same category of services or as part of a composite supply.

Leasing, renting, or hiring of motor vehicles, vessels, or aircraft, except in the specific cases mentioned for motor vehicles, vessels, and aircraft above.

Travel benefits extended to employees on vacation, such as leave or home travel concessions.

Works contract service for the construction of an immovable property (except plant & machinery or for providing a further supply of works contract service).

Goods and/or services for the construction of an immovable property, whether to be used for personal or business use.

Goods and/or services where tax has been paid under the composition scheme.

Goods and/or services used for personal use.

Goods or services or both are received by a non-resident taxable person, except for any of the goods imported by him.

Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

ITC will not be available in the case of any tax paid due to non-payment or short tax payment, excessive refund, or ITC utilized or availed by reason of fraud or willful misstatements or suppression of facts or confiscation and seizure of goods.

Special cases: Standalone restaurants will charge only 5% GST but cannot enjoy any ITC on the inputs.

The expenditure spent on Corporate Social Responsibility (CSR) initiatives by corporates.

4. Order of Utilization of Input Tax Credit (In-Depth):

The rules governing how ITC can be utilized to offset output tax liability are specific and must be followed:

Integrated Tax (IGST):

The credit of IGST can be utilized in the following order:

1. Against output IGST liability.
2. Against output CGST liability.
3. Against output SGST/UTGST liability.

Central Tax (CGST):

The credit of CGST can be utilized in the following order:

1. Against output CGST liability.
2. Against output IGST liability.

Important: CGST credit cannot be used to offset SGST/UTGST liability.

State Tax (SGST) / Union Territory Tax (UTGST):

The credit of SGST/UTGST can be utilized in the following order:

1. Against output SGST/UTGST liability.
2. Against output IGST liability.

Important: SGST/UTGST credit cannot be used to offset CGST liability.

Cess:

The credit of GST Compensation Cess can only be utilized to offset the output GST Compensation Cess liability.

5. Input Tax Credit on Capital Goods (Detailed Rules):

Definition: Capital goods are assets used in the course or furtherance of business, including plant, machinery, equipment, buildings, vehicles (under certain conditions), etc.

Eligibility: ITC can be claimed on GST paid on the purchase of capital goods intended for business use, subject to the general conditions.

Claiming ITC: The full ITC on capital goods can be claimed in the same tax period in which the goods are received.

Apportionment: If capital goods are used partly for business and partly for non-business purposes, or for making both taxable and exempt supplies, the ITC needs to be attributed only to the taxable supplies made for business.

Depreciation: If a business claims depreciation on the tax component of capital goods under the Income Tax Act, they cannot claim ITC on that tax component under GST.

Sale of Capital Goods: If capital goods on which ITC has been claimed are subsequently sold, the business needs to pay GST on the transaction. The rules for determining the taxable value and the amount payable are specified under the GST law.

6. Input Tax Credit in Specific Scenarios:

Job Work: The principal manufacturer can claim ITC on inputs sent to a job worker for processing, provided the finished goods are either received back by the principal or supplied directly from the job worker’s premises.

There are timelines specified for the return of goods, failing which the supply to the job worker may be treated as a supply by the principal.

Inputs Sent for Testing or Repairs: ITC is allowed on inputs sent out for testing, repairs, or any other processing that does not amount to a supply.

Goods Lost, Stolen, Destroyed, or Disposed Of: No ITC is allowed on goods that are lost, stolen, destroyed, written off, or given away as gifts or free samples.

Imports: ITC can be claimed on the Integrated Tax (IGST) paid on the import of goods, provided the importer has a valid Import Export Code (IEC) and the other conditions for claiming ITC are met.

The documents required include the bill of entry and the invoice.

Deemed Supplies: In certain situations, even without an actual sale, transactions may be treated as supplies under GST (e.g., transfer of business assets).

ITC rules apply to these deemed supplies as well.

7. Reversal of Input Tax Credit (Comprehensive):

ITC that has been claimed may need to be reversed in various situations:

Non-Payment to Supplier Beyond 180 Days: This has been detailed earlier.

Inputs Used for Exempt Supplies: If a portion of inputs or input services is used for making exempt supplies, the corresponding ITC must be reversed.

The reversal is usually calculated based on the ratio of exempt turnover to total turnover.

Inputs Used for Non-Business Purposes: ITC claimed on inputs or input services used for personal consumption or any non-business activity must be reversed.

Capital Goods Used for Exempt Supplies: Similar to inputs, ITC on capital goods used for making exempt supplies needs to be reversed.

The reversal is typically done over a period of time.

Issuance of Credit Note by Supplier: If the supplier issues a credit note for a reduction in the value of supply after ITC has been claimed, the recipient needs to reverse the excess ITC claimed.

Switching to Composition Scheme: A regular taxpayer opting for the composition scheme needs to reverse the ITC on the stock of inputs, semi-finished goods, and finished goods held on the date of the switch.

Incorrect Claim of ITC: If it is found that ITC has been claimed incorrectly or without meeting the necessary conditions, it must be reversed.

8. Refund of Accumulated Input Tax Credit (Further Details):

A registered person can claim a refund of unutilized ITC in specific scenarios:

Zero-Rated Supplies (Exports): If a registered person makes zero-rated supplies (exports of goods or services), they are eligible for a refund of any unutilized ITC related to these supplies.

Inverted Duty Structure: This occurs when the tax rate on inputs is higher than the tax rate on output supplies.

In such cases, the taxpayer may be eligible for a refund of the accumulated ITC.

Conditions and Exclusions: There are specific conditions and exclusions related to claiming refunds of accumulated ITC.

For instance, refunds are generally not allowed if the output supplies are nil-rated or fully exempt.

9. Time Limit for Claiming Input Tax Credit:

The time limit to claim ITC on any invoice or debit note is the earlier of the following:

The due date for furnishing the return under section 39 for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains.

The date of furnishing of the relevant annual return (GSTR-9).

It is crucial to claim ITC within this timeframe, as it will not be allowed afterwards.

10. Record Keeping for Input Tax Credit:

To ensure compliance and facilitate audits, businesses are mandated to maintain proper records related to their purchases, including invoices, debit notes, credit notes, and other relevant documents pertaining to the ITC claimed.

These records must be preserved for the period specified under the GST law and rules.

11. Penalties and Interest on Incorrect ITC Claims:

Availing or utilizing ITC in contravention of the rules can attract penalties and interest as prescribed under the GST Act.

It is imperative for businesses to exercise due diligence and ensure accuracy while claiming ITC to avoid such consequences.

12. Recent Amendments and Notifications:

The GST landscape is dynamic, with frequent amendments and notifications being issued by the government.

Businesses must stay informed about the latest changes in the GST law and rules related to ITC to maintain compliance.

Regularly checking the official GST portal and updates from tax authorities is crucial.

Conclusion:

Navigating the realm of GST Input Tax Credit (ITC) demands a comprehensive understanding of the conditions for claiming it, the rules governing its utilization and reversal, and the various scenarios where ITC may or may not be available.

This ultimate guide by Disytax has aimed to provide you with a detailed overview of these critical aspects.

By adhering to these guidelines, maintaining meticulous records, and staying abreast of the latest GST updates, businesses can effectively manage their ITC, optimize their tax liabilities, and contribute to a transparent and efficient GST ecosystem.

For personalized advice and expert assistance in navigating the complexities of GST ITC, do not hesitate to contact the professionals at Disytax.

Need expert guidance on ITC claims and GST compliance? Contact Disytax today for personalized assistance and ensure your business stays on the right side of the law.