Input Tax Credit Mechanism Under GST

Goods and Services Tax (GST) is considered the biggest reforms in India. However, one thing that has become the talking point is – the mechanism of input credit under GST.

In simple words, Input Credit means at the time of paying tax on sales, you can reduce the tax you have already paid on purchases.

In this article, we’ll cover all you need to know about Input Tax Credit (ITC) under GST, the time limit to avail ITC, how to calculate Input Tax Credit, how to claim ITC, the situation where you can not avail ITC and much more.

What is Input Tax Credit?

Input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.

The concept is not entirely new as it already existed under the pre-GST indirect taxes regime (service tax, VAT and excise duty). Now its scope has been widened under GST.

Earlier, it was not possible to claim input tax credit for Central Sales Tax, Entry Tax, Luxury Tax and other taxes. In addition, manufacturers and service providers could not claim the Central Excise duty.

During the pre-GST era, cross-credit of VAT against service tax/excise or vice versa was not allowed. But under GST, since these taxes will be subsumed into one tax, there will not be the restriction of setting off this input tax credit.

The conditions to claim Input Tax Credit under GST is a very critical activity for every business to settle the tax liability.

Input Tax Credit can’t be applied to all type of inputs, each state or a country can have different rules and regulations. Input Tax Credit is also viable to a dealer who has purchased good to resale.

Tax Credit is the backbone of GST and for registered persons is a major matter of concern. This is majorly in line with the pre-GST regime. These rules are quite stringent and particular in their approach.

Say for instance that you are a manufacturer. The tax to be paid on the final product is INR 450. The purchase tax paid is INR 300. The input credit you claim is INR 300, and the final taxes you will pay is INR 150.

GST INPUT TAX CREDIT MECHANISM

Input Tax Credit (ITC) means credit of tax already paid on purchases that can be adjusted against tax collected on sales. The balance (if any) is required to be paid to government.

  • First Check whether the credit falls under Eligible credit or Blocked credits.
  • Next check the conditions to be fulfilled to claim the credit & time available to avail the credit.

Eligible Credit

There are certain conditions mentioned in the law which are treated as the valid conditions for availing credit under GST and hence those items attribute to the eligible ITC under GST.

Blocked Credit

Blocked credit under GST means the supply of goods and services on which the availment of credit has been restricted by the relevant provisions of law.

WHAT ARE THE BLOCKED GOODS AND SERVICES NO CONDITIONS ARE REQUIRED FOR CLAIMING CREDIT?

  • Membership of a club, health and fitness centre.
  • Under Construction of Immovable Property (on own account).
  • Local purchases by a Non resident taxable person.
  • Goods/services used for personal consumption.
  • Goods Lost/ Stolen/ Destroyed/Written off.
  • Goods Disposed of by way of gift or free samples.
  • Tax paid under Demand/Seizure/confiscation.
  • Membership of a club, health and fitness centre.

WHAT CONDITIONS YOU HAVE TO FULFIL FOR TAKING ITC IF YOU ARE A REGISTERED PERSON?

Moreover,these 4 conditions are very important because, in case even if one condition is not fulfilled, Credit cannot be claimed, even though it is an eligible Credit.
� He is in possession of Invoice/Debit note/Other tax paying document.
� He has received the goods or services or both
� The Seller, (who has collected the tax from buyer) must have paid the taxes to the government.
� Both supplier and receiver have furnished GST returns.

Amendment Notification with respect to the provisions of  Input Tax Credit

Input Tax Credit Central Goods and Services Tax (Amendment) Rules, 2019 Notification No. 03/2019 – Central Tax 29/01/2019

  Prior 01/02/2019 W.e.f 01/02/2019
Restriction placed Input Tax Credit on Motor Vehicles Input tax credit has been restricted for motor vehicles for transportation of persons having a seating capacity of not more than 13 persons except when they are used for making further supply of motor vehicles, transportation of passengers or imparting training on driving such motor vehicles.
  Input Tax Credit on Vessels and Aircrafts input tax credit shall not be available in respect of vessels and aircraft except when they are used for making further supply of such vessels or aircrafts, transportation of passengers, imparting training or navigating such vessels or imparting training on flying such aircraft.
  Input Tax Credit on Services of General Insurance Input tax credit for services of general insurance, servicing, repair and maintenance relating to motor vehicles, vessels or aircrafts shall be available only where the motor vehicles, vessels and aircrafts are used for the above-mentioned purpose or received by a taxable person engaged in the manufacture of such motor vehicles, vessels or aircrafts or in the supply of general insurance services in respect of such motor vehicles, vessels or aircrafts
  Input tax credit on employee-related welfare goods or services or both Input tax credit on employee-related welfare goods or services or both (eg food and beverages, outdoor catering, beauty treatments, health services, etc.) shall be available where such supply is used for making outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply
  Input tax credit of services such as club memberships, health and fitness centres, travel benefits on vacation, etc Input tax credit of services such as club memberships, health and fitness centres, travel benefits on vacation, etc. shall be available where the provision of such goods or services or both is obligatory for an employer to provide its employees under any law for the time being in force
Inclusion of an explanation An explanation has been inserted to provide that the ‘value of exempt supply’ shall not include the value of activities or transactions specified in Schedule III (other than the sale of land and building).

 

Conditions for Availment of Input Tax Credit:

  1. The said goods or services or both are used or intended to be used in the course or in the furtherance of his business;
  2. He is in possession of tax invoice/ debit note / tax-paying document issued by a supplier registered under this Act.
  3. He has received the said goods or services or both subject to job-work facilities and restrictions relating to input tax credit
  4. The supplier has uploaded the relevant invoice on the GSTN (online GST portal);
  5. The supplier has paid the said amount of tax (as charged in the invoice) to appropriate Government in cash or by way of utilization of input tax credit, as admissible;
  6. He – claimant of input tax credit – has furnished GST return in FORM-GSTR 2;

Goods received in instalments: If goods are received in instalments against a single invoice, credit can be taken upon receipt of last instalment of goods.

Failure to pay to supplier of goods or service or both, the value of supply and tax thereon:

If recipient of goods/services has not paid the supplier within 180 days from date of invoice, the amount equal to input tax credit availed along with the interest will be added to output liability of the recipient. The said input tax credit can be re-availed on payment of value of supply and tax payable thereon.

A. What is the difference between the availment of ITC in case of Compulsory Registration and Voluntary Registration?

In case of application for compulsory registration the input tax credit on stocks can be availed on the day immediately preceding the date from which he becomes liable to pay tax and in case of application for voluntary registration the input tax credit on stocks can be availed on the day immediately preceding the date of grant of registration under the provisions of the Act.

B. In case of change of scheme from composition scheme to Regular scheme whether input tax credit can be claimed on capital goods?

Under the GST law the composition dealer is not entitled for ITC and the scheme granted will stand withdrawn from the day on which the aggregate turnover exceeds fifty lakh rupees.

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1 comment

  • Personal Tax Accountant Auckland

    This is great information, it will help us a lot to understand tax credit mechanism. Thank you very much for sharing this, and also I am very impressed the way you have explained about the topic here. Very nicely written article!! I must say this, if you get time can visit stuartsnowaccounting.co.nz for ideas on this topic.

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