Input Tax Credit (ITC)

What is Input Tax ?

“Input tax” has been defined in section 2 (57) of the MGL (Model GST Law) and section 2 (1) (d) of the IGST Act. Input tax in relation to a taxable person, means the (IGST and CGST) in respect of CGST Act and (IGST and SGST) in respect of SGST Act, charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his business and includes the tax payable under sub-section (3) of section 7.

What is Input Tax Credit (ITC) ?

Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases. Goods and Services Tax (GST) is an integrated tax system where every purchase by a business should be matched with a sale by another business. This makes flow of credit across an entire supply chain a seamless process.

What is the implication of different definition of “input tax” in three acts like CGST, SGST and IGST Acts?

  • It implies that input tax consists of IGST & CGST in CGST Act and IGST & SGST in SGST Act.
  • In the IGST Act, input tax consists of all three taxes namely, IGST, CGST and SGST.
  • Input Credit Can be set of against:

a)IGST - IGST, CGST and SGST

b)CGST - IGST & CGST

c)SGST - IGST & SGST

  • It further implies that credit of all three can be used for discharging IGST liability, whereas only credit of IGST & CGST can be taken in CGST Act and that of IGST & SGST can be taken under SGST Act. Further the credit of CGST & SGST cannot be cross-utilised.

What are the Conditions for availing of ITC ?

Following are conditions for availing ITC,

  • Taxpaying documents such as tax invoice, debit note etc.,
  • Goods / service should have been received/deemed to be received by the taxable person
  • Tax charged on the invoice and should have been paid to the credit of government.
  • Return should have been furnished by the tax payer.
  • Credit for goods against an invoice received in lots / installments can be availed only on last lot in installment.
  • The timelines for entitlement of credit against a particular invoice shall lapse on the expiry of one year from date of issue.

How does it work?

At each stage of the supply chain, the buyer gets credit for the input tax paid, and they can use it to offset the GST that needs to be paid to the Centre and State governments.

How to claim ITC? (An example)

Assume that there is a seller S and he sold his goods to B. Now B who is a buyer will be eligible to claim the input tax credit on purchases based on the invoices. So,

  • Accordingly, S will upload the details of all the tax invoices issued in GSTR 1.
  • All the details in accordance with the sales to B will auto-populate in GSTR 2A, and the same data will be taken when B will file GSTR 2 (i.e details of inward supply).
  • B will then accept the details that the purchase has been made and reported by the seller accurately and subsequently the tax on purchases will be credited to ‘Electronic Credit Ledger’ of B and he can adjust it against future output tax liability and get the refund.

What are the time limits for claiming Input Tax Credit ?

ITC can only be claimed for tax invoices and debit notes which are less than a year old. In any other case, the last date to claim ITC is the earlier of the following:

  • Before filing valid GST returns for month of September following the end of the financial year applicable to that invoice. For example, for an invoice issued on June 26, 2018, ITC should be claimed by August 2018.
  • Before filing a relevant annual return
  • Input Tax Credit in case of Imports -

Under the GST Regime, the input tax credit of IGST and GST Compensation Cess is available to the importer. However, the input tax credit of Basic Customs Duty (BCD) would not be available. In order to avail ITC of IGST and GST Compensation Cess, an importer has to mandatorily declare GST Registration number (GSTIN) in the Bill of Entry. The Customs EDI system would be interconnected with the GST portal for the validation of ITC. Bill of entry in the non-edi locations would be digitised and used for validation of input tax credit provided by the GST portal.

What are the items that are not eligible for ITC?

Though input tax credit can be claimed by a person registered under GST for most inputs, some types of goods and services are not eligible for input tax credit claim. In this article, we look at such goods and services, which are not eligible for input tax credit under GST.

1.Motor Vehicles or Conveyances

Input tax credit can be claimed for motor vehicles or conveyance only when they are used for making a further supply of such vehicles or conveyances or transportation of passengers or imparting training or for transportation of goods. Hence, expenses related to the normal use of motor vehicles for office purposes cannot be claimed as an input tax credit.

2.Food, Beverages and Outdoor Catering

Expenses relating to food, beverages and outdoor catering can be claimed as input tax credit only when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. Hence, regular taxpayers would not be eligible for claiming input tax credit on expenses relating to food, beverages and catering.

3.Beauty Treatment, Health Services & Cosmetic and Plastic Surgery

Beauty treatment, health services, cosmetic and plastic surgery related expenses cannot be claimed as input except when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or as an element of a taxable composite or mixed supply.

Similarly, expenses relating to membership of a club, health and fitness centre is not eligible for input tax credit.

4.Life and Health Insurance

Expenses relating to rent-a-cab facilities, life or health insurance can be claimed as input tax credit only when the Government notifies it as services which are obligatory for an employer to provide to its employees under law. Else, to claim input tax credit, the inward supply must have been used for making an outward taxable supply of the same category or as part of a taxable mixed supply.

5.Travel Benefits for Employees

Travel benefits extended to employees on vacation such as leave or home travel concession cannot be claimed as input tax credit.

6.Works Contract Services

Works contract services, when supplied for construction of an immovable property (other than plant and machinery), cannot be claimed as input tax credit. However, work contract services can be claimed as an input tax credit when it is an input service for the further supply of works contract service.

7.Construction of Immovable Property

Goods or services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account or even when it’s used in the course or furtherance of business cannot be claimed as input tax credit. Under GST Act, construction includes re-construction, renovation, additions or alterations or repairs.

8.Non-Resident Taxable Person

Goods or services received by a non-resident taxable person except on goods imported by him is not eligible for input tax credit.

Know more about GST registration for non-resident taxable person.

9.Personal Consumption

Goods or services used for personal consumption is not eligible for input tax credit.

10.Lost or Stolen or Damaged Goods

Input tax credit is not available for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

11.Composition Supply

Goods or services or both on which tax has been paid under the Composition Scheme will not be eligible for input tax credit. Also tax paid as interest, penalty or fine will not be eligible for input tax credit.