Introduction about Input Tax Credit in GST
Input Tax Credit (ITC) in GST is a fundamental concept in the Goods and Services Tax (GST) system that allows registered taxpayers to offset the tax they pay on their purchases against the tax they collect on their sales. In other words, you may check below:-
Input Tax Credit (ITC) in GST is a mechanism under the GST system that enables businesses to claim a credit for the GST paid on their purchases of goods or services. This credit can be used to offset the GST liability on their sales. In simpler terms, it allows businesses to reduce their tax liability by the amount of GST they have already paid on inputs.
Types of Input Tax Credit in GST
There are three types of Input Tax credit in gst, depending on the nature of their transactions and the GST structure which are given as follows-
- Central Goods and Services Tax (CGST) Credit:
- This type of ITC is associated with the Central GST component of GST.
- It is used to offset tax liability arising from the supply of goods or services within the same state or union territory.
- Businesses can claim CGST credit on purchases of goods and services made within their own state or union territory.
- State/Union Territory Goods and Services Tax (SGST/UTGST) Credit:
- SGST/UTGST ITC corresponds to the state or union territory GST component.
- It is used to offset tax liability for intra-state supplies within the same state or union territory.
- SGST is applicable in states, while UTGST is applicable in union territories that have not been granted special status.
- Integrated Goods and Services Tax (IGST) Credit:
- IGST credit is associated with the Integrated GST component.
- It is utilized to offset tax liability arising from inter-state supplies, i.e., when goods or services are supplied from one state or union territory to another.
- IGST is a combination of CGST and SGST/UTGST, and businesses can claim IGST credit when they make purchases across state or union territory borders.
Who is Ineligible to claim Input Tax Credit in GST?
Here are some common scenarios where ITC cannot be claimed:
- Non-registered suppliers: You cannot claim ITC for GST paid on purchases from suppliers who are not registered under GST. To claim ITC, the supplier must be a registered GST taxpayer.
- Blocked Credits: The GST law specifically identifies certain goods and services for which ITC cannot be claimed. Some examples include:
- Motor vehicles (except when used for specific taxable activities).
- Goods and services used for personal consumption.
- Food and beverages, outdoor catering, beauty treatment, health services, etc., unless they are used for making outward taxable supplies.
- Works contract services for the construction of an immovable property (except for specified cases).
- Composition scheme supplies (businesses opting for the composition scheme cannot claim ITC).
- Exempt Supplies: If your business deals with exempt supplies (supplies for which GST is not applicable), you generally cannot claim ITC on the inputs, input services, or capital goods used for those exempt supplies.
- Composition Scheme: If your business has opted for the composition scheme under GST, it is not eligible to claim ITC. Under the composition scheme, businesses pay GST at a fixed rate on their turnover and cannot claim ITC on their purchases.
- Non-compliance: If you or your supplier have not complied with GST regulations, including filing returns or providing accurate documentation, you may be ineligible to claim ITC until compliance is met.
- Goods and Services Used for Non-business Purposes: ITC can only be claimed for goods and services used for business purposes or for making taxable supplies. If these inputs are used for non-business purposes or for making exempt supplies, ITC cannot be claimed.
- Invoices or Documents Not in Compliance: The invoices or documents you possess must comply with GST rules. If there are discrepancies or inaccuracies, such as incorrect GSTIN, invoice number, or date, your ITC claim may be rejected.
- Time Limit: There are time limits for claiming ITC. Generally, ITC for a particular financial year can be claimed until the due date of filing the September return of the following financial year or while filing the annual return, whichever is earlier. Failure to claim ITC within this timeframe can result in the loss of credit.
Note: If taxpayers have availed and used ineligible ITC, interest of 18% has to be paid. Interest need not be paid if ineligible ITC is only availed, without being used.
What are the Documents Required for input tax credit in GST?
To avail Input Tax Credit (ITC) under the Goods and Services Tax (GST) system, businesses need to maintain and provide specific documents that serve as evidence of their eligible GST payments on purchases.
- Tax Invoice: A tax invoice is one of the most critical documents for claiming ITC. It should contain the following details:
- Supplier’s GSTIN (Goods and Services Tax Identification Number).
- Recipient’s GSTIN.
- Invoice number and date.
- Description of goods or services.
- Quantity and unit of measurement.
- Value of goods or services.
- Applicable GST rate and amount (separate columns for CGST, SGST/UTGST, and IGST).
- Place of supply (mentioning the state/union territory or indicating if it’s an inter-state supply).
- Debit Note or Credit Note: If there are changes to the original invoice, such as price adjustments or product returns, debit notes and credit notes should be issued. These should include the same details as tax invoices and clearly mention the reasons for the adjustment.
- Receipt Vouchers: Receipt vouchers are essential when you receive advance payments and should contain details similar to tax invoices.
- Bill of Supply: If you are registered under the composition scheme or if you are supplying exempt goods or services, you should issue a bill of supply instead of a tax invoice. It should contain the same details as a tax invoice, except it should not include GST.
- Delivery Challan: A delivery challan is used to transport goods from one place to another without a sale. It’s essential for businesses engaged in the transportation of goods. The details on the delivery challan should match the tax invoice.
- Import Documents: If you are importing goods or services, documents such as Bill of Entry, Importer Exporter Code (IEC) certificate, and customs duty payment receipts are required to claim ITC.
- Registration Certificate: Proof of your GST registration is necessary when claiming ITC.
- Monthly GST Returns: Accurate and timely filing of GST returns, including GSTR-1 (outward supplies), GSTR-2A (auto-drafted inward supplies), GSTR-2B (input tax credit available), and GSTR-3B (summary return), is crucial. These returns help validate your ITC claims.
- Annual GST Return: For comprehensive reconciliation and to claim any unclaimed ITC, the annual GST return (GSTR-9) should be filed accurately.
- Reconciliation Statements: Businesses often maintain internal reconciliation statements to match the invoices and returns filed by suppliers with their own records.
- Other Supporting Documents: Depending on the nature of your business and transactions, you may require additional documents, such as purchase orders, delivery notes, payment vouchers, and supplier agreements, to substantiate your ITC claims.
How to Utilization of Input Tax Credit in GST?
RULE 1: Credit can be utilized to pay off the liabilities in the following manner:
(a) IGST input tax credit in gst shall first be utilized towards payment of IGST liability and the amount remaining, if any, may be utilized towards the payment of CGST, SGST/UTGST liabilities in any order, before utilizing the CGST, SGST/UTGST credit.
(b) CGST input tax credit in gst shall first be utilized towards payment of CGST liability and the amount remaining, if any, may be utilized towards the payment of IGST liability. CGST credit shall be utilized only if IGST credit is not available.
(c) SGST/UTGST input tax credit in gst shall first be utilized towards payment of SGST/UTGST liability and the amount remaining, if any, may be utilized towards payment of IGST liability (if no CGST credit is available). SGST/UTGST credit shall be utilized only if IGST credit is not available.
(d) CGST input tax credit in gst cannot be utilized towards payment of SGST/UTGST liabilities and
(e) SGST/UTGST input tax credit in gst cannot be utilized towards payment of CGST liabilities.
RULE 2: ITC cannot be utilized for payment of reverse charge liabilities.
RULE 3: ITC can be utilized for payment of tax only.
RULE 4: ITC can’t be utilized for payment of TDS/TCS/interest/penalty/fee/others.
RULE 5: The amount allowed to be entered for utilization of credit can’t be more than the amount of balance available in the Electronic Credit Ledger.
RULE 6: A unique transaction number shall be generated at the Common Portal for each debit or credit to the electronic cash or credit or liability ledger and the same will be reflected in the corresponding ledgers of the taxpayer.
RULE 7: Credit availed on input CESS paid on inward supplies will be available for set-off against any output tax liability of Cess only. There is no Inter head adjustment for Cess Input Tax Credit.
Advantage of Input Tax Credit in GST
Input Tax Credit (ITC) is one of the significant advantages of the Goods and Services Tax (GST) system. It plays a crucial role in reducing the overall tax burden on businesses and encourages compliance. Here are the key advantages of ITC in GST:
- Elimination of Tax on Tax (Cascading Effect): Under the pre-GST tax regime, taxes were levied at multiple stages of production and distribution, leading to a cascading effect where tax was charged on the tax component of the previous stage. ITC in GST eliminates this cascading effect by allowing businesses to claim credit for the GST paid on their inputs, reducing the overall tax burden.
- Cost Reduction: By claiming ITC, businesses can reduce their cost of production or provision of services. This can result in lower prices for consumers, making products and services more affordable.
- Competitive Advantage: Businesses that can claim input tax credit in gst (ITC) are often more competitive in the market as they can offer their goods or services at a lower cost than businesses that cannot claim ITC. This encourages fair competition.
- Cash Flow Improvement: ITC provides a cash flow advantage to businesses. Instead of paying GST in full at the time of sale, businesses pay GST net of ITC. This helps in managing working capital efficiently.
- Encouragement for Tax Compliance: To claim ITC, businesses need to ensure proper documentation, file accurate GST returns, and deal with GST-compliant suppliers. This encourages businesses to comply with GST regulations and reduces the scope for tax evasion.
- Transparency and Digitization: ITC is claimed and processed electronically through the GST portal, promoting transparency in the tax system. It also encourages businesses to adopt digital processes and maintain digital records.
- Reduced Tax Evasion: Since businesses can claim input tax credit in gst (ITC) only if their suppliers have paid the applicable GST, it acts as a check on tax evasion in the supply chain. This helps in curbing tax fraud and ensuring a more robust tax collection system.
- National Integration: ITC is available for both interstate and intrastate transactions. This promotes economic integration and simplifies the tax structure by treating goods and services uniformly across the country.
- Encouragement for Investment: Businesses are more likely to invest in technology, infrastructure, and expansion when they can reduce their tax costs through ITC. This can lead to increased economic growth and job creation.
- Improved Compliance Ratings: A high compliance rating is often required for businesses to participate in government tenders and obtain loans. Maintaining accurate records and complying with GST rules to claim ITC can lead to higher compliance ratings.
- Refund for Exports: For exporters, input tax credit in gst (ITC) helps in claiming refunds of GST paid on inputs and services, making exports more competitive in the global market.
Input Tax Credit in GST is a pivotal feature that not only benefits businesses by reducing their tax burden and improving cash flow but also promotes tax compliance, transparency, and fair competition in the marketplace.
How to do input tax credit in gst with example?
Let’s go through the process of claiming Input Tax Credit in gst (ITC) in GST with an example:
Scenario: Imagine you run a business that manufactures and sells electronic gadgets. You have purchased raw materials and other inputs to manufacture these gadgets, and you want to claim input tax credit in gst (ITC) for the GST paid on these purchases.
- Ensure GST Registration:
- Before you can claim input tax credit in gst (ITC) , ensure that your business is registered under GST, and you have a valid GSTIN (Goods and Services Tax Identification Number).
- Check Supplier’s GST Compliance:
- Verify that your suppliers are registered under GST and have been filing their GST returns accurately. This is essential because you can only claim input tax credit in gst (ITC) if your suppliers have correctly reported the GST they collected from you.
- Maintain Proper Documentation:
- Maintain all tax invoices, debit notes, credit notes, and other relevant documents related to your purchases. Each document should contain the required details (as mentioned in the GST law).
- Identify Eligible ITC:
- Determine which of your purchases are eligible for ITC. In your case, eligible purchases may include raw materials, electronic components, packaging materials, etc., used directly in the manufacture of electronic gadgets.
- Ensure Correct GST Rate:
- Confirm that the GST rate mentioned in the invoices matches the actual tax rate applicable to the goods or services you’ve purchased. For example, electronic components may attract a different GST rate than packaging materials.
- Prepare Your GST Return (GSTR-3B):
- Summarize your sales and purchases for the tax period in the GSTR-3B return. This return is filed monthly.
- Calculate Eligible ITC:
- Calculate the total eligible ITC based on the GST paid on your eligible purchases. For instance, if you’ve paid Rs. 10,000 in GST on eligible purchases, your eligible ITC would also be Rs. 10,000.
- Fill Out GSTR-3B Form:
- In your GSTR-3B form, you’ll enter the total GST payable and the total ITC available in the respective sections. In this example, your eligible ITC is Rs. 10,000.
- Offset ITC Against GST Liability:
- Offset the ITC against your GST liability. Let’s say your GST liability on sales for the month is Rs. 15,000. You can use the available ITC of Rs. 10,000 to reduce this liability.
- GST Liability on Sales: Rs. 15,000
- ITC Available: Rs. 10,000
- Balance Tax to be Paid in Cash: Rs. 5,000 (Rs. 15,000 – Rs. 10,000)
- Pay GST in Cash:
- Pay the balance GST liability (Rs. 5,000) in cash through the GST portal.
- File Your GST Return:
- After completing all the necessary details, submit your GSTR-3B return on time, adhering to the GST filing due dates.
- Maintain Records:
- Keep copies of all filed returns, invoices, and other relevant documents in an organized manner. These records are crucial for audits and compliance.
If you want to more about input tax credit in gst under GSTR-3B return then follow or watch below video-