Input Tax Credit under GST

Input Tax Credit (ITC) is a fundamental concept under India’s Goods and Services Tax (GST) system. It allows businesses to reduce their tax liability by claiming credit for the GST paid on purchases related to their business activities. This mechanism ensures that tax is levied only on the value addition at each stage of the supply chain, preventing the cascading effect of taxes.

What is Input Tax Credit?

Input Tax Credit (ITC) refers to the credit that a registered taxpayer can claim for the GST paid on purchases of goods or services used for business purposes. This credit can be utilized to offset the GST liability on sales, thereby reducing the overall tax burden.

Example: If a manufacturer pays ₹10,000 as GST on raw materials and collects ₹15,000 as GST on the sale of finished goods, they can claim an ITC of ₹10,000 and need to pay only the remaining ₹5,000 to the government.

Eligibility Criteria for Claiming ITC

To claim ITC under GST, the following conditions must be met:

1. GST Registration: The person must be registered under GST.
2. Possession of Valid Documents: A valid tax invoice, debit note, or other prescribed documents must be available.
3. Receipt of Goods or Services: The goods or services must have been received.
4. Tax Payment by Supplier: The supplier must have paid the GST collected to the government.
5. Filing of Returns: The recipient must have filed the necessary GST returns.
6. Timely Payment to Supplier: Payment for the supply, including tax, must be made to the supplier within 180 days from the date of invoice.

Conditions to Claim ITC

In addition to the eligibility criteria, certain conditions must be satisfied to claim ITC:

• Business Use: The goods or services must be used or intended to be used in the course or furtherance of business.
• No Depreciation on Tax Component: If depreciation is claimed on the tax component of capital goods, ITC cannot be claimed on that component.
• Matching with GSTR-2B: The details of the invoice must be reflected in the recipient’s GSTR-2B.
• Timely Claim: ITC must be claimed within the earlier of the following:
  • 30th November of the subsequent financial year.
  • Date of filing the annual return.

Ineligible ITC (Blocked Credits)

Certain goods and services are not eligible for ITC under Section 17(5) of the CGST Act:

• Motor Vehicles: ITC is not available for motor vehicles used for personal purposes.
• Food and Beverages: Expenses on food, beverages, outdoor catering, etc., are ineligible unless used for making outward taxable supplies of the same category.
• Memberships: Club memberships, health, and fitness center expenses are not eligible.
• Personal Use: Goods or services used for personal consumption.
• Construction Services: Goods or services used for the construction of an immovable property (except for plant and machinery).
• Goods Lost or Destroyed: ITC cannot be claimed on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Time Limit to Claim ITC

ITC must be claimed within the earlier of the following:

• 30th November of the subsequent financial year.
• Date of filing the annual return for that financial year.

Example: For an invoice dated 15th July 2024, the ITC must be claimed by 30th November 2025 or before filing the annual return for FY 2024-25, whichever is earlier.

Documents Required for ITC Claim

To claim ITC, the following documents are necessary:

• Tax Invoice issued by the supplier.
• Debit Note issued by the supplier.
• Bill of Entry for imported goods.
• Invoice issued by the recipient in case of reverse charge transactions.
• Invoice or Credit Note issued by an Input Service Distributor (ISD).

Reversal of ITC

ITC claimed must be reversed in the following situations:

• Non-Payment to Supplier: If payment is not made to the supplier within 180 days from the date of invoice.
• Goods Lost or Destroyed: If goods are lost, stolen, destroyed, or disposed of by way of gift or free samples.
• Change in Use: If goods or services initially intended for business use are later used for personal purposes.

Conclusion

Understanding and complying with the provisions related to Input Tax Credit is crucial for businesses to optimize their tax liability under GST. Proper documentation, timely payments, and accurate return filings are essential to ensure seamless ITC claims.

If you need further assistance or have specific queries regarding ITC, feel free to ask!