What Is Input Tax Credit In GST? And How To Claim It?
- September 29, 2020
- Posted by: Editorial Team
The Goods and Services Tax (GST) regulation, which was implemented and enforced in the country in the year 2017 by the government of India, is considered being one of the most fundamental reforms in the country’s taxation system. It has finally, brought together all indirect taxes under one roof and has imposed pre-determined rates of GST for goods and services.
Input credit had existed even before GST – in the form of Value Added Tax (VAT) input credit for manufacturers and/or businesses towards the sale of goods or services or both.
What is an Input Credit?
An input credit basically means that at the event of making tax payment towards output/sale of goods or services, the manufacturer of the goods/commodities can reduce the amount of tax payment for that particular commodity/item. In other words, an Input Tax Credit (ITC) means decreasing the taxes paid on inputs from taxes to be paid on output. When a certain good(s)/commodity or service(s) is furnished to a taxable person, the GST that is charged is thus, referred to as an input tax.
The concept isn’t always completely new because it had already existed under the pre-GST tax regime of indirect taxes (such as service tax, VAT and excise duty). Now, its reach has been widened under the GST regime. Erstwhile, it was not easy to claim input tax credit score for central sales tax, entry tax, luxury tax and different taxes. In addition, producers and providers of services could not claim the central excise duty. During the time before the implementation of GST, cross-credit of VAT towards service tax/excise or vice versa had not been permitted. However, under GST regulations, due to the fact that these taxes might be subsumed into one tax, there will no longer be the limit of placing off this input tax credit.
The criteria that is laid down to claim Input Tax Credit under GST is a very crucial task for each enterprise to settle the tax liability. Input Tax Credit cannot be applied to all sorts of inputs, each state or a country can have different regulations and laws. Input Tax Credit is also viable to a provider who has purchased goods/commodities in order to re-sale.
The tax credit is the back-bone of GST and for registered persons, it is a chief matter to be of concern. This is vastly in line with the pre-GST law. These policies are quite stringent and precise in their approach.
To better understand an input credit, let us consider a simple example here.
Let’s say that you are a manufacturer of a certain product. Now, the amount of tax that is payable on that output, which is the final product, is Rs. 500. Also, the tax that is to be paid on the input or purchase of the product is Rs. 400. Therefore, you, being the manufacturer of the product, can claim input credit of Rs. 400 and you are only required to make a deposit of Rs. 100 towards tax payment.
How Input Credit Functions under GST?
Let us take an example here to understand how input tax credit actually works under GST.
Suppose Mr. A is a seller. He sells goods to Mr. B. The consumer, which is Mr. B, is now eligible to claim the purchase credit using his purchase invoices.
Now, this is how an input credit works:
- Mr. A uploads all his tax invoices information as issued in GSTR-1.
- The details uploaded by means of Mr. A is populated automatically or reflected in GSTR-2A. This same information gets pondered while Mr. B files the GSTR-2 returns which might be nothing but the information of his purchase.
- The information of the sale is then accepted and mentioned for by means of Mr. B, and subsequently, the purchase tax is credited to Mr. B’s ‘Electronic Credit ‘ He can use this to modify it later for future output tax liability and receive a refund.
How is Input Tax Credit (ITC) Calculated?
In order to understand how an input tax credit is calculated, let us take a look at a simple example.
Let’s say, you own a business in any part of the country. Now, the goods/commodities or services that you trade to consumers has a tax rate of 18% levied towards GST. You use input services or goods throughout your business. The tax due from you (i.e.,18%) may be adjusted to the taxes paid already through you on the purchase of such inputs. The producers add taxes handiest for the value addition done, but not on the full product cost.
Let us take into account an instance of a metallic utensils producer who manufactures utensils like spoons, plates, etc. Assume that the manufacturer had bought a Rs. 500 well worth of raw metal to make a pressure cooker and Rs. 100 really worth other uncooked materials. Let’s anticipate that the GST for steel is 18%. Also, expect that the GST he paid is 28% of other uncooked materials.
Hence, the producer has paid Rs. 28 on other raw materials and Rs. 90 on raw metallic which he used as inputs. So, the entire enter tax paid turned into Rs. 118 by way of the producer.
Now, after taking into account the value of manufacturing metal pressure cooker through the use of the raw substances and including a respectable profit, he determined to sell the pressure cooker to a distributor for Rs. 800 plus GST.
Again, let’s assume that the steel utensil attracts a GST of 18%. Now the tax on it is going to be Rs. 144. So, the producer will bill the pressure cooker for Rs. 944. Hence, the producer is accumulating Rs. 144 as GST on sale from the distributor. The producer had paid Rs. 118 as GST all through the purchase of his input raw substances. Hence, out of Rs. 144 of GST, the manufacturer can now claim a credit of Rs. 118 which he already paid in the direction of GST for inputs and deposit the difference of Rs. 26 with the government.
This input tax credit is available in any respect succeeding stages, retailers and distributors price GST and can claim the input tax credit.
Documents and Forms Required To Claim Input Tax Credit (ITC)
Each applicant will require the following documents in order for him/her to claim input tax credit (ITC) under GST:
- Supplier issued bill for offering the services and goods or both in accordance with GST law.
- A debit note issued by the supplier to the recipient in case of tax payable or taxable cost as specified in the invoice is much less than the tax payable or taxable price on such supplies.
- Bill of entry.
- A credit note or invoice that is to be issued by means of the ISD (Input Service Distributor) in accordance with the GST bill rules.
- A bill issued such as the invoice/bill of supply under certain situations in preference to the tax bill. If the amount is less than Rs. 200 or in conditions in which the reverse fees are applicable in keeping with the GST law.
- A supplier issued a bill of supply for goods/commodities and services or both as in keeping with the GST invoice rules.
The above-mentioned documents prepared in accordance with the GST invoice rules should be supplied even as submitting the GSTR-2 form. However, failure to provide those forms can lead to both rejection or resubmission of the request. For taxes paid on goods and services or both because of any fraud or because of order for the demand raised, suppression of information, or wilful misstatement, Input Tax Credit cannot be claimed.
Since input credit will be to be made available to the seller at every stage, the input tax credit is anticipated to drop the overall taxes that are charged on the product at present. So, if the input credit mechanism works efficiently, the final consumers may also see a reduction in the cost.
How To Claim Input Credit?
In order to claim input credit under GST, there are certain conditions that must be met:
(a) You should have a tax bill/invoice towards the purchase or a debit note that is issued via a registered dealer.
Note: Where goods are obtained in lots/instalments, credit will be to be made available against the tax invoice upon receipt of last lot or instalment.
(b) You ought to have received the goods/services.
Note: Where recipient does not pay the cost of service or tax thereon within 3 months of issue of invoice, and he/she has already availed input credit based totally on the invoice, the said credit score will be brought to his/her output tax liability alongside with interest.
(c) The tax charged to your purchases has been deposited/paid to the authorities by way of the dealer in cash or through claiming input credit.
(d) Supplier has filed his/her GST returns.
Perhaps, the most striking reform of GST is that input credit is allowed only if your provider has deposited the tax he/she gathered from you. So, every input credit that you are going to claim shall be matched and verified before you may actually claim it.
Thus, in order to permit you to claim input credit on purchases, all of your suppliers must be GST compliant as well.
There is even more that you ought to know about input credit:
(e) It is possible to have unclaimed input credit because of taxes being higher on purchases than on sales. In this type of situation, you are allowed to carry forward or claim a refund.
If in case, tax on inputs is greater than the tax on output, then you can carry forward input tax or claim a refund. On the other hand, if, in case, the tax on output is greater than the tax on inputs, then you are required to pay the balance. No interest is paid on input tax balance by means of the authorities.
- Input tax credit cannot be availed on purchase invoices that are more than one 12 months old. This duration is calculated from the date of the tax invoice.
- Since, GST is charged on both goods and services, therefore, input credit may also be availed on both goods and services (apart from those which are on the exempted/negative list).
- Input tax credit is permitted on capital items as well.
- Input tax is not allowed for goods and services that are for non-public use.
- No input tax credit will be allowed after GST return has been filed, following the end of the financial year to which such invoice pertains or submitting of applicable annual return, whichever is earlier.
What is the Time Limit to Claim Input Tax Credit (ITC) under GST?
ITC can be availed by a registered taxable individual in a specified way and within a stipulated time period. The details will show the different conditions wherein the inputs can be claimed for semi-completed goods or inventory or completed items.
ITC Claims Time Limit
(a) If a person has applied for registration or is liable to register or is granted registration.
(b) When a person takes registration voluntarily.
(c) When a taxable registered person stops paying taxes in composition levy scheme.
Day from when he is liable to pay taxes.
Day of registration.
Day from when he is liable to pay tax normally.
Input tax credit for the conditions mentioned above can be claimed only if it does not exceed 365 days from the date of issuance of the tax invoice associated with supply. However, in case of some other cases, input tax credit needs to be claimed with regard to the following:
- a) Furnishing of annual return, or
- b) Due date of submitting the monthly GSTR-3 return for the next financial year’s September month.