written by Khatabook | August 3, 2021

GST Input Tax Credit on Supply of Goods or Services

Input Tax Credit or ITC is considered a crucial part of the GST regime. In earlier indirect taxes, the credit mechanism was governed by the CENVAT Credit Rules and the respective states for the taxes levied by the Union Government and states. This is why the credit of central taxes and state-level VAT could not be set off against each other. With GST's emergence at both central and state levels, India achieved the objective of set-off and avoidance of cascading taxes.

What is ITC under GST?

The Input Tax Credit under GST is a tax that a taxpayer pays on purchase and subsequently claims the credit on the sale of goods/services. In other words, ITC is a credit claimed by the taxpayer to the extent of taxes paid to reduce his tax liability. Input Tax Credit is available on procurement of goods and services if used or intended to be used for taxable supplies. This ensures a seamless flow of credit in GST.

Examples of Input Credit Tax (ITC) under GST 

There are a variety of cases of Input Tax Credit under GST with examples. Some of the simple examples to understand the meaning of ITC are as follows:

1. Suppose Mr A buys raw materials for his business worth Rs 20,000 from Mr B. He paid 18% GST of Rs 3600 on the purchase. After converting the raw materials to finished goods, he sold the final goods to Mr C for Rs 30,000. He charged a GST of 18% of Rs 5400. What is the net GST payable and ITC claimed in this case?

Particulars

Amount

GST paid on outward supply

5400

Less: GST paid on inward supply

3600

Net GST Payable

1800

 As Mr A has already paid Rs 3600 on the purchase, the credit available is Rs 3600. He can now use this ITC to reduce his tax liability to Rs 1800. The final GST payable to the Government is Rs 1800. This is the power of Input Credit Tax.

2. Umang Traders is a registered supplier of goods in Kerala. It bought goods valued at Rs 50,000 from Riya Suppliers within the same state. Riya suppliers charged SGST & CGST of 9% each as it is an intra- state transaction. Subsequently, Umang Traders sold the goods valuing Rs 40,000 to XYZ manufacturers. 20% of the inputs purchased are still lying in stock and there was no opening stock of goods. What is the net GST payable by Umang Traders and ITC claimed or carried forward?

Particulars

Amount

GST paid on sales or outward supply (40,000*9%*2)

7200( CGST= 3600, SGST= 3600)

Less: GST paid on the purchase or inward supply (50,000*9%*2)

9000 (CGST= 4500, SGST= 4500)

Net GST Payable or ITC carried forward

(1800)

In the present case, Umang Traders has a credit of Rs 9000 that can be adjusted against Rs 7200. His final tax liability is Nil and he can carry forward his excess ITC of Rs 1800.

If some material has not been used, full credit is available if the supplier intends to use such material for taxable purposes in future.

Circumstances of availing ITC

  • A registered person can claim Input Tax Credit on inward supply of goods or services if such goods or services are used in the course or furtherance of business.
  • Where goods or services are used partly for business and partly for non-business purposes, the taxpayer can only claim ITC for business purposes.
  • Where goods or services are partly used for making exempt supplies, partly for zero-rated supplies and partly for taxable supplies, the taxpayer can avail ITC attributable to taxable supplies and zero-rated supplies.

Eligibility for claiming Input Tax Credit under GST

There are some conditions to be eligible for claiming ITC under GST. As per Section 16 of the CGST Act, a taxpayer needs to follow all the below-mentioned conditions:

1. Possession of Tax Paying Document

 A registered taxpayer can claim Input Tax Credit based on any of the documents mentioned-

  • Invoice issued by the supplier of goods and services
  • Invoice issued by the recipient where the recipient is liable to pay tax under reverse charge
  • A debit note issued by a supplier
  • Bill of entry
  • Document issued by Input Service Distributor

2. Receipt of Goods or Services

The person must receive the goods or services before taking credit for taxes paid on the purchase. Although, it is not necessary that only the recipient can take delivery of goods. It means that receipt of goods includes the delivery to another person in place of the recipient.

3. Tax payment to the Government

The supplier must pay the amount of tax to the Government in cash or by way of the utilization of ITC. If he fails to do so, he can't claim Input Tax Credit.

4. Filing of Return

Only tax payment is not necessary. To claim ITC, the registered person must file his GSTR 3B as required under section 39 of the CGST Act.

5. ITC available on receipt of last lot

Where there is a big consignment and the goods covered in the invoice are received in multiple lots, the registered person can claim ITC upon the receipt of the last instalment.

6. Non-availability of dual benefit

If a registered person is claiming depreciation under Section 32 of the Income-Tax Act, he can't avail the benefit of ITC. It means that the dual benefit can't be claimed under the Income Tax Act,1961 and GST Laws together.

7. Time limit for credit availment

The time limit for claiming credit on invoices or debit notes of a financial year shall be earlier of the following:

  • Date of filing of Annual Return (by 31st December), or
  • Due date of filing of return for September of the succeeding financial year (by 20th October)

These time limits are only applicable in case of availment of credit for the first time.

Also Read: GSTR-4: Return Filing, Format, Eligibility & Rules

Rule 36(4) of CGST Act, 2017

This rule provides a restriction in claiming Input Tax Credit. As per rule 36(4) of the CGST Rules, 2017, a taxpayer can claim Input Tax Credit (ITC) while filing GSTR 3B only to the extent of 5% of the eligible credit available in return GSTR 2B. To claim the credit, the taxpayers must upload all the details of invoices or debit notes of such invoices in GSTR 1. Earlier, the ITC claim was restricted to 10% in the year 2020. It ranged to 20% in the period from 9th October to 31st December 2019.

The restricted amount of ITC should not exceed the actual eligible ITC available for the invoices that are not uploaded. 

This rule prevents the taxpayers from taking inflated ITC. Some taxpayers take inflated ITC, even if proper tax invoices or debit notes are not available. That's why the restrictions have been brought on the availing/claim of ITC.  

Blocked Credits {Section 17(5) of CGST Act}

Generally, Input Tax Credit is available on all inputs and input services used for the supply of goods and services. However, there are some cases where ITC is not admissible. As per Section 17(5) of GST laws, there is a list where the taxpayer cannot take credit on the purchase as follows:

1. Motor Vehicles meant for transportation of persons having approved sitting capacity of not more than 13 persons, except when they are engaged in making taxable supplies-

  • Further supply of such vehicles (like the sale or renting of motor vehicles)
  • Transportation of passengers (like cars purchased by a cab service agency for use as cabs)
  • Imparting training on driving such motor vehicles (cars purchased by a driving school for use while imparting driving training)

2. Vessels and aircraft except when they are engaged in making taxable supplies of-

  • Further supply of such vessels or aircraft (like renting or sale of vessel/aircraft)
  • Transportation of passengers (like vessels purchased by transport agency for use)
  • Imparting training driving such vessels or aircraft (vessels/aircraft purchased by a driving school for use during the course of imparting driving training)

3. Services of servicing, general insurance, repair and maintenance related to motor vehicles, vessels or aircraft are not available for credit purposes except the following-

  • Where such motor vehicles, vessels or aircraft are eligible for credit purposes
  • Where a taxable person receives such services engaged in the manufacture of such motor vehicles, vessels or aircraft (manufacture of such vehicles)
  • Where a taxable person receives such services engaged in the supply of general insurance services for such motor vehicles, vessels or aircraft

4. Food & beverages, beauty treatment, outdoor catering, health services, cosmetic & plastic surgery, renting, hiring or leasing of motor vehicles, vessels or aircraft are ineligible for credit purposes, except for the following-

  • When the Government has made it obligatory for an employer to provide any of these services to his employees under any law 
  • Inward supply of these services used for making outward supply of the same category or as a mixed or composite supply

5. Works contract services for the construction of immovable property except for the following situations-

  • Inward supply of these services used for further supply of works contract service
  • Where the immovable property is Plant and Machinery, work contract services used for construction of such P&M.

6. Inward supply for the construction of immovable property other than preventive maintenance (P&M). This condition holds even when such supplies are used in the course of business.

7. When the taxable person pays tax on Inward supplies under Composition Scheme

8. When a non-resident taxable person receives inward supply except on goods imported by them

9. No credit is available in case of membership of a health or fitness centre and club

10. Case of personal consumption of goods and services

11. Goods lost, destroyed, stolen or disposed of as a gift or free samples

12. When employees receive travel benefits such as Home Travel Concession or LTC

Reversal of Credit

As per Section 18 of the CGST Act, there may be some situations where credit already availed needs to be reversed. The situations are as follows:

  • When a registered person (who has claimed ITC) switches from regular levy to composition scheme
  • When there is a cancellation of registration
  • When goods or services supplied become wholly exempted from tax

Special Cases of ITC

There are some special cases of ITC that you should know about:

1. ITC in case of Capital Goods

Input Tax Credit is also available for capital goods except in some cases:

  • Where the capital goods are used for making exempt supplies
  • The use of capital goods for personal consumption (for non-business purposes) 

2. ITC on Job Work

There may be a situation where a manufacturer sends goods to a job worker for further processing. In this situation, the manufacturer can take credit for tax paid on purchasing such goods sent for Job work.

3. ITC in the case of Input Service Distributor (ISD)

Input Service distributors can claim the credit on all the purchases made of goods and services and distribute them among the branches.

4. ITC on Transfer of Business

In case of sale, merger, amalgamation, transfer or lease of business, unused ITC can be transferred to the new entity. There must be a specific provision for the transfer of liabilities to the new entity. 

Also Read: GSTR 9 Due Date Extended: Common issues faced by CAs while filing GSTR 9

Conclusion

This was all about GST Input Tax Credit and its concepts. We hope you found some useful information on GST Input Tax Credit Rules and the provisions.

FAQs

1. What are inputs?

Inputs are goods other than the capital goods used or intended to use by a supplier in the course of business.

2. Is Input Tax Credit available on Zero-rated supplies?

Yes, ITC may be availed on goods or services used for supplies made in the course of export or to an SEZ Developer/SEZ Unit.

3. What are the consequences if a person has claimed ITC but not paid the invoice amount?

A taxpayer must pay the value of goods or services within 180 days from the invoice date. If he fails to do so and further claims ITC, the credits available will be added to his tax liability. Also, he will be liable to pay 18% interest from the date of availing credit till the invoice value is paid.

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