What is Input Tax Credit?

Input credit means while paying tax on output, you can reduce the tax you have already paid on inputs and can reduce the total amount on output tax.

When you buy any product or service from the registered dealer, you pay tax on every purchase. And while selling the product to another buyer, you collect the tax. You adjust the tax paid at the time of purchase with the amount of tax on sales and balance the liability tax that has to be paid to the government for the buying and selling of products. This procedure is called the utilization of input tax credit.

Who can claim ITC?

ITC can be claimed by any person who is registered with GST and fulfills all the guidelines of ITC as mentioned below:

  • The dealer should have a tax invoice
  • Mentioned goods have been received
  • Filed returns
  • The tax has been paid to the government by the supplier.
  • If an entity is receiving goods in installments, the ITC can be claimed when the last lot is received
  • If the depreciation has been claimed on the tax component of goods, no ITC will be applicable.

How to claim ITC?

In the FORM GSTR-3B, all the taxpayers have to pay the input tax credit amount in their monthly GST returns.

Under the 20% of the eligible ITC reported by suppliers in the auto-generated GSTR-2A return, a taxpayer can claim ITC on a provisional basis in the GSTR-3B. Before proceeding with filing the GSTR-3B, a taxpayer should cross-check the GSTR-2A. Before October 2019, a taxpayer could have claimed any amount of provisional ITC. But now, as per the CBIC, a taxpayer can claim up to 20% of the eligible ITC available in the GSR-2A.

Reversal of Input Tax Credit

ITC is applicable only on the goods/services for business purposes. ITC cannot be claimed on personal goods or for making exempt supplies. Apart from this, here are the few situations where ITC can be reversed:

  1. ITC will be reversed for the invoices which are not paid within the 180 days of the timeline.
  2. For ISD, if a credit note is issued by the seller to the HO, then ITC will be reversed.
  3. It is for the business which uses inputs for both personal and professional purposes. For personal purposes goods, the ITC will be reversed proportionately.
  4. The calculated ITC on exempted/non-business inputs is more than actually reversed ITC in a year, then the difference amount will be added to the liability output and also the interest will be applicable.

Reconciliation of ITC

A person who claims IT has to fulfill all the requirements demanded by his supplier in the GST return. In a case of mismatch, the recipient and supplier will communicate regarding the inconsistency after filling the GSTR-3B.

Goods/Services not eligible for claiming ITC

  • Motor vehicles except when they are supplied in the course of business like transportation of goods or passengers.
  • Membership of different clubs like – health center, game center, or fitness center.
  • Goods and services on which taxes are already paid under the composition scheme.
  • Services like renting a cab, health insurance, or life insurance.
  • Goods received by a taxable person for constructing an immovable property on his account.
  • Travel expenses are offered to the employees, such as leave or home travel concession.

Frequently Asked Questions

What is the time limit for taking input tax credit?

The supplier has claimed the input tax credit within 180 days of issuing the invoice. If the buyer fails to claim ITC, the credited amount will be added to the output tax liability.

Can ITC be claimed on all the inputs and capital goods in one installment?

Yes, under Section 16(2) of GST, all the inputs and capital goods in one installment.

Who is eligible to file ITC, under the SGST and CGST act?

All the taxpayers registered under GST and filling the GST regularly can avail of the ITC credited in electronic hedger under SGST and CGST.

What is ineligible ITC?

Motor vehicles used for transportation of passengers. ITC is also not applicable to the purchase of aircraft and vessels. Ineligible ITC also includes leasing, hiring, or renting of the vehicle.