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What is an input tax credit?

Input tax credit (ITC) means taxes paid on purchases of goods or services can be claimed at the time of payment of taxes on output.

For example, Mr. Juneja is running a garments shop, and in the month of November, he paid a tax of Rs 1000 on purchases and collected tax of Rs 1500 from customers. In the instant case, the tax of Rs 1000 paid by Mr. Juneja is ITC and can be reduced while making payment of tax dues. Accordingly, he is liable to deposit Rs 500 (1500-1000) to the government.

Similarly, In Goods and Services tax, a registered taxpayer can claim the GST paid on purchases against GST liability on outward supplies. Undoubtedly, ITC is one of the major reliefs provided to the taxpayers in the GST regime. But the fact also cannot be denied that a lot of amendments in ITC provisions have created complications not only for businesses but for CA professionals also. Let’s proceed towards the solution you are looking for.

Conditions to claim ITC

Under the GST regime, ITC can be claimed only after the following conditions are satisfied:

  • A claimant must be registered in the GST regime.
  • Possession of GST compliant invoice or debit note issued by the registered supplier.
  • Goods or services have been received.
  • Relevant GST returns have been filed.
  • Tax paid on purchases has been deposited by the supplier to the government.
  • Supply must not be covered under blocked credit.
  • Payment for the respective supply must be made within 180 days.

Documents required for claiming GST credit

Taxpayers have to submit the following documents on the common portal to claim GST credit -

(i) GST compliant invoice issued by a supplier

(ii) A Bill of Entry in case of imports

(iii) An invoice/credit note issued by input service distributor

(iv) A bill of supply issued by the supplier, if any

(v) Debit Note issued by the supplier for less amount charged in invoice

(vi) Invoice issued as a recipient under reverse charge mechanism

Time limit to claim ITC (Section 16((4))

The upper time limit for taking ITC is the due date of filing the return for the month of September of the next financial year or the date of filing of annual return, whichever is earlier. The underlying reasoning for this limit is that no change in return is permitted after September of next financial year. If annual return is filed before the month of September, then no change can be made after filing of annual return.

Exception

The above time limit does not apply to claim for re-availing of credit that had been reversed earlier.

What is blocked credit?

With the introduction of the GST in India, expectations were high on seamless availability of Input Tax Credit on various business expenses such as employee insurance, business travel, rent-a-cab, etc., that are currently 'blocked' under the GST law. In brief, the taxpayer cannot avail ITC on goods or services specified as "Blocked Credit" under Section 17(5) of the CGST Act.

As per section 17(5), GST credit shall not be available in respect of the following supplies:-

  • Motor vehicles and conveyances for transportation of persons
  • Vessels and aircraft
  • Membership of a club, health & fitness center
  • Works contract service
  • Restaurants
  • Composition scheme
  • Personal consumption
  • Free samples
  • Travel benefits to employees
  • Non-resident taxable person
  • Outdoor catering
  • Health services
  • Beauty treatment services
  • Food and beverages
  • Cosmetic & plastic surgery

Order of utilization of input tax credit in GST regime

Once all conditions of claiming ITC are satisfied it would be credited in the electronic credit ledger and can be used to pay GST dues. As per new rules, the balance available in the credit ledger shall be used in the following manner-·

  • ITC of integrated tax first shall be utilized to pay integrated tax dues and then balance will be utilized to pay dues of state tax/central tax. Please note that before utilizing the credit of state tax & central tax, the credit of integrated tax shall be utilized FULLY in any manner to pay dues of integrated tax/central /state tax.
  • ITC of state tax first shall be utilized to pay state tax and then balance will be utilized to pay integrated tax.
  • ITC of central tax first shall be utilized to pay central tax and then balance will be utilized to pay integrated tax.

When a refund of the accumulated input tax credit can be claimed?

A refund of ITC is available in the GST regime if ITC is accumulated on account of the following supplies.

(1) Exports without payment of IGST

(2) Inverted duty structure

(3) Supplies to SEZ units/SEZ developers without payment of IGST

Reversal of input tax credit

Reversal of ITC means credit availed by the taxpayer will be added to output liability in the electronic cash ledger. Also, the taxpayer shall liable to pay interest on the reversal amount from the date of availing of input credit to the date of payment. Following are the cases when credit needs to be reversed;

(1) Payment has not been made to the supplier within 180 days from the invoice date. In the case of part payment of invoice, ITC will be reversed on a proportionate basis.

(2) Input used for personal purposes or exempted supplies. In that case, the amount of reversal will be calculated on a proportionate basis.

(3) Taxpayer switches to a composition scheme. In that case, the electronic credit ledger will be debited equal to the ITC balance on the day immediately preceding the date on which the taxpayer liable to pay as a composition dealer.

(4) ITC availed on supplies that are covered under blocked credit.

Input tax credit forms

GST forms related to ITC has summed up in one place by way of the below table-

Form

Form Description

Form GST ITC-01

Form ITC-01 is filed by newly registered taxpayers to claim the tax credit.

Form GST ITC-02

Form ITC-02 is filed to transfer the credit from the electronic credit ledger of the transferor to the transferee in case of business transfer.

Form GST ITC-03

Form ITC-03 is used to pay credit through electronic cash or credit ledger. This form is filed under two cases;

a) Taxpayer switches from normal to composition scheme,

b) Taxable supply become an exempt supply

Form GST ITC-04

Form ITC-04 is used to file a declaration in case of job-work

 

Treatment of input tax credit in various situations

 

1. Goods received in installments 

One of the preconditions to claim credit in GST is that goods or services must be received. Accordingly, if goods are received in installments, credit would be available only on receipt of the last installment.

For example, in the month of November, ABC enterprises made a payment of Rs 500,000 (Including GST of Rs 90,000) for raw material. The vendor delivered material to ABC enterprises in three lots - 1st lot in November, 2nd lot in December, and the final lot in the month of January. In the given situation, ABC enterprises can take a tax credit of Rs 90,000 in January on receipt of the final lot.

2. Goods sent for Job Work

As per section 19 of CGST Act, the principal manufacturer eligible to take credit on goods sent out for further processing to a job worker, with the condition that goods sent on job work must be received back by the manufacturer within 1 year (or 3 years in case of capital goods). It is relevant to note that credit is available even goods sent directly to the place of the job worker without bringing back it to the main manufacturer premises.

3. GST composition scheme

Under the composition scheme, a taxpayer is liable to pay GST at a lower fixed rate, and therefore the benefit of ITC would not available. Also, the composition dealer is not permitted to take credit for tax paid in the reverse charge mechanism. 

If a composition dealer ceases to pay tax under the composition scheme and liable to pay as a regular taxpayer then he can take credit in respect of the following-

a) Input held in stock;

b) Input contained in semi-finished goods and finished held in stock;

c) Capital goods.

4. Import transactions

Integrated tax or compensation cess paid on import transactions can be used for payment of GST dues. However, basic custom duty paid by the importer would not be admissible as ITC. And, to validate ITC in imports,

a) GST number must be declared in the Bill of Entry

b) GST common portal will be inter-connected with the customs EDI system

5. Cancellation of registration

GST cancellation can be done by the tax officer on his own motion or at the request of a taxpayer. Once GST is canceled, ITC would not be available from that date. Not will only that, a refund of surplus credit will also not permissible.

Input tax credit provisions in different business sectors

 

1. Works contract service

GST credit shall be available to the taxpayer if works contract service for:

  • Installation of plant and machinery or
  • Construction of Immovable property which is received as input service for further supply.

For example,

(a) ABC builder (Sub-Contractor) provides service of construction of building to XYZ builder (Main Contractor) – XYZ is entitled to take credit of GST paid to ABC.

(b) ABC Builder (Sub-Contractor) provides service of construction of building to Tech Company –Tech Company shall not be allowed to take credit of GST paid to ABC.

(c) ABC Builder provides service of installation of plant or tools to Tech Company - Tech Company is entitled to take credit of GST paid to ABC.

2. Good Transportation Agency (GTA)

GTA is permitted to claim the credit in GST only if he is liable to pay tax. Further, GTA has the option to pay GST @ 5% without taking the benefit of ITC. But this option must be chosen by GTA at the beginning of the year.

For example, GTA transports goods to an unregistered dealer. Freight- Rs 35,000. Tax paid by GTA on inward supplies – Rs 2000.

Option 1: GTA opted to pay GST @ 12%.

Tax liability of GTA will be (35000*12%) 4,200 –Rs 2000 = Rs. 2200

Option 2: GTA opted to pay GST @ 5%.

Tax liability of GTA will be 35000^5% = Rs 1,750. No credit would be available in this option.

Hotel & Restaurants

Restaurants are not allowed to claim credit in GST as restaurants are liable to pay GST at a lower rate of 5%. However, this credit restriction will not be applicable to restaurants inside hotels having a room tariff of Rs 7,500 or more. For example, 

  1. Food courts at the metro station cannot claim ITC on purchases and they will pay GST at a lower rate of 5%.
  2. Amrit Sagar restaurant in Taj Lake Place will pay GST @12% on sale after reducing the tax paid on purchases.

Hotel accommodation bill

GST paid on a bill of hotel accommodation can be claimed while paying GST dues subject to the following conditions -

  • Hotel accommodation must be for business purposes.
  • Taxpayer must be registered under GST in the state of the service provider (hotel).

Accounting entries of input tax credit in the books

Transaction

Accounting Entry

Entry

Debit

Credit

Purchases within the state (ITC claimed)

Inward Supplies A/c

XXX

 

ITC-CGST A/c

XXX

 

ITC-SGST A/c

XXX

 

To  Creditor

 

XXX

Purchases outside the state (ITC claimed)

Inward Supplies A/c

XXX

 

ITC-IGST A/c

XXX

 

To Creditor

 

XXX

Utilization of ITC

Output Tax Liability – CGST A/c

XXX

 

Output Tax Liability – SGST A/c

XXX

 

Output Tax Liability – IGST A/c

XXX

 

To ITC-CGST A/c

 

XXX

To ITC-SGST A/c

 

XXX

To ITC – IGST A/c

 

XXX

Reversal of ITC for inward supplies within state

ITC Reversal –CGST A/c

XXX

 

ITC Reversal –SGST A/c

XXX

 

GST Interest A/c

XXX

 

To ITC-CGST A/c

 

XXX

To ITC-SGST A/c

 

XXX

To Interest Payable A/c

 

XXX

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