Input Tax Credit (ITC) Under GST
ITC is elaborated in section 2 (1) (d) of the IGST Act and section 2 (57) of the Model GST Law. It is one of the major elements of fathoming, which has innumerable implications under the Goods and Services Tax (GST).
In the case of transforming scenario, the Indian Government keeps incorporating many amendments to this GST law. Different rules and regulations are precisely illustrated under this GST law in ITC for all the taxpayer’s categories.
In brief, ITC (Input Tax Credit) is the backbone of GST and the crucial reason for GST introduction. Let’s find out ITC’s accurate definition and other important criteria.
Overview: Input Tax Credit
ITC is a tax payable by a business after purchasing something, and it can also be used to minimize its debt during a sale. To put simply, businesses can curtail their debt by demanding credit, while its amount being in proportional with or equals to the GST paid on various purchases.
On the other hand, GST is a consolidated tax policy where every business purchase must be paralleled with a sale by another company/individual. It ensures there is a seamless credit flow throughout the whole supply chain.
Let’s understand this by an example:
If you have bought merchandise worth Rs. 100, and paid Rs. 5 as GST, which means that you impose 5% GST on items. Therefore, when such goods are sold at Rs. 200 and payable GST will be Rs. 10, implying the GST amount, 5%. Therefore, the net tax liability would be Rs. 10 subtracted from Rs. 5, i.e., Rs. 5.
The process of claiming Input Tax Credit under GST
A few prerequisites are there for claiming ITC tax under GST. Therefore, a business can only claim ITC after fulfilling the following conditions:
- You should have a debit note or a tax invoice issued by a registered dealer
- You must have acquired the services or goods
- It must have an invoice comply to GST
- Returns have been classified
- Its supplier has reimbursed GST to Government and uploaded the invoice to the GSTN
A business under the composition category is restrained from availing of ITC. Moreover, Input Tax Credit can’t be collected for personal usage or goods with an exemption.
N.B: Where merchandise can be availed in installments, credit would be available as per the tax invoice of the last installment.
Probably, the most significant path-breaking GST reform is that ITC is only permitted if your supplier has provided the tax he collected from you. Therefore, every input credit you are demanding must be crosschecked and matched before you claim this.
In order to allow you to claim input credit on buying items from your suppliers, it shall be GST compliant.
You must garner more information about ITC:
- Innumerable probabilities are there to have unclaimed input credit as the tax on buying items is comparatively higher than a tax on the sale. Therefore, you are permitted to claim a refund or to carry forward.
- ITC can’t be levied on purchase invoices of 1 year older or more. A period is computed from the date of the tax invoice.
- ITC can’t be claimed for capital merchandise.
- As GST can’t be levied on both services and goods for self-usage.
- No ITC should be permitted after GST return has been tabulated for September following the end of the Fiscal year to which an invoice filing or about the appropriate annual return.
Claiming ITC with a relevant example
Let’s assume that a seller “A” sold his merchandise to “B.” “B” is denoted a buyer, who is eligible to claim ITC on various purchases in terms of the invoices. Therefore,
- Correspondingly, B will upload tax invoices details issued while filing GSTR 1.
- All the important details in compliance with B’s sales will automatically appear in the GSTR 2A. Also, similar data will be extracted when B will file GSTR 2.
- After that, B will accept the information that the purchase is real and reported accurately by the sellers.
- In the end, the taxes on buying items will be credited to “Electronic Credit Ledger” of B.
- The buyer business can then modify future output tax liability and claim the refund.
ITC of CGST/ UTGST / SGST/ IGST
GST charges levied by CGST/ UTGST/ IGST/ SGST are shown below:
- CGST, aka Central Goods and Services Tax, imposed on intra-union or intra-state territory on goods supply or services and denoted as Central tax.
- SGST, aka State Goods and Services Taxlevied on goods or services supply or both within a similar state and is termed as State Tax.
- UTGST, aka Union Territory Goods and Services Tax, charged on goods supply within a similar union territoryalso known as Union Territory Tax.
- IGST, aka Integrated Goods and Serviceslevied on goods and service supply within inter-state and known as Integrated tax.
The ITC of such components of GST would be permitted in the following manner:
- Input Tax Credit of Central GST
ITC of CGST is allowed 1st for payment. After that, the remaining balance can be used for the IGST payment. CGST credit isn’t allowed for SGST payment.
- Input Tax Credit of State or Union Territory GST
It is permitted 1st for payment of UTGST/SGST. The remaining balance can easily be utilized for the IGST payment. However, credit of UTGST or SGST isn’t permitted for CGST payment.
- Input Tax Credit of Integrated GST
It is similarly allowed 1st for IGST payment, after that, for the CGST payment, and the balance for UTGST or SGST payment.
Eligibility and conditions to acquire ITC
- GST registration is necessary according to the GST law
- An appropriate tax invoice is required
- You should gain the goods and services or even both
- File all the returns according to section 39
- In terms of receiving goods in installments, claiming ITC can be done when the last installment is obtained.
What are the non-eligible items for ITC?
- Food, outdoor catering, and beverages
- Life and health insurance
- Construction property
- Damaged merchandise
- Beauty treatment
Hopefully, this article has illustrated all the major points of ITC, definition, eligibility, and many more. It’s tried to elaborate on the concepts in simple terms from the understandings achieved from the GST law sections.
