All you need to know about ITC (Input Tax Credit)
Personal Finance

All you need to know about ITC (Input Tax Credit)

What is Input Tax Credit (ITC)?

To eliminate ‘tax on tax’, Input Tax Credit (ITC) component was introduced into the GST structure. The term ‘Input’ means any product that will be used by you for a period of time but excludes capital goods. Therefore, the tax paid on such inputs is called “Input Tax.” These may incorporate IGST, CGST, and SGST/UTGST. In simpler words, in ITC the recipient of inputs; you can deduct the tax paid amount on inputs against the tax on your output.

Prerequisite To Avail ITC

As goods or/and service supplier to claim ITC, you should meet the conditions listed in section 16th of the CGST Act:

  • Right off the bat, you should be registered under the GST law.
  • At that point, you should have the tax receipt/debit note issued to you by the provider of the input.
  • You should get the goods or/and services.
  • Your inputs provider paid the tax payable on such supply.
  • If you are getting a product in portions, you can claim ITC when the last part is received.
  • If you have avail depreciation on that particular input, at that point you can’t benefit ITC on the said input.
  • You should claim ITC within the specified time-frame.

Documents Required For Claiming ITC

You need the following documents to claim ITC:

  • An Invoice issued by your goods or/and service provider
  • The Invoices that fall under the Reverse Charge Mechanism category
  • A Debit note issued by your supplier
  • A Bill of Entry
  • An Invoice or Credit Note issued by an ISD.
  • A Bill of Supply issued by a composition scheme holder
  • A Bill of Supply issued by the exporter of exempted goods.

ITC Reversal

There are some circumstances where the Input Tax Credit (opens in a new tab/window) benefited can be reversed. This occurs in the event if you:

  • Unable to pay your provider inside 180 days from the date of issue of receipt
  • Goods or service for personal use
  • Use goods for creating exempted supplies
  • Sale of capital goods
  • Adoption of composition scheme

The ITC gets reversed if:

  • If your registration is canceled
  • Credit Note issued to ISD
  • ITC on inputs utilized for exempted or non-business intention is more than the reversal of ITC during that particular year or vice-versa.

ITC Reconciliation

The process of ITC reconciliation starts once the due date for filing GSTR ends. Your purchase register shall match with that of your GSTR 2A (GSTR 1 of your supplier).

There can be two possible outcomes:

  1. Either the details match, in such case the ITC that you avail is correct or when the details don’t match and you need to communicate this to your supplier to make necessary amendments.
  2. If you do not pay the tax within the specified time period, the ITC can be reversed. Moreover, if you have availed access ITC, it will add back to your tax liability.

ITC Utilization

From 1st Feb 2019, the Order for claiming ITC has been amended. Let us understand Old Set off rule and new set off rule with the same example:

Before 1st Feb 2019

Payment 1stAdjustment 2ndAdjustment
IGST IGST CGST & SGST
CGST CGST IGST
SGST SGST IGST

Example:

ITC ITC Amount Output Liability 1st Set-off 2nd Set-off Balance ITC Balance to pay in cash
IGST 200 100 100-100 (IGST)
CGST 50 100 100-50 (CGST) 50-50 (IGST)
SGST 50 100 100-50 (SGST) 50-50 (IGST)

After 1st Feb 2019

Payment for 1stAdjustment 2nd Adjustment
IGST IGST CGST & SGST
CGST IGST CGST
SGST IGST SGST

Example:

ITC ITC Amount Output Liability 1st Set-off 2nd Set-off Balance ITC Balance to pay in cash
IGST 200 100 100-100 (IGST)>
CGST 50 100 100-100 (IGST) 50
SGST 50 100 100-50 (SGST) 50

So, here we can see that after using the new set-off rule, the taxpayer will be left with the balance ITC of Rs.50 and the liability of Rs.50 which has to be paid in cash.

Input Tax Credit Claim For Special Cases

Here are some special cases where the taxpayer can claim ITC

Products Sent To Job Worker

In this case, the principal sends inputs to the job-worker to carry out the manufacturing process. In this case, if you are the manufacturer, you can claim ITC on the tax paid on such inputs sent to job worker.

You can avail ITC regardless of whether you sell the final product straightforwardly from the place of the job worker.

Along these lines goods that are given to job worker can either be taken back to the principal or sold straightforwardly from the place of job worker:

Providing that the goods are sold within the stipulated time period i.e., for normal goods 1 year and for capital goods 3 years.

ISD

This idea identifies with a business that has various units or workplaces. The ISD (Input Service Distributor) alludes to an office that gets numerous invoices from the goods and services supplier.

Presently, when Input Service Distributor claims ITC for the purchase of goods and services, it disperses the ITC to the units. The Input Tax Credit distribution among the recipient units is done based on the previous turnover of such unit.

Capital Goods

ITC can be availed on the purchases of capital goods. In any case, when you have already claimed the depreciation, no ITC will be permitted.

Further ITC cannot be availed if Capital Goods used for:

  • Personal purpose
  • A non-business purpose
  • Producing exempted products

Merger, Demerger, Amalgamation or Transfer of Business

When there is a change in the constitution or nature of the business due to merger, demerger, amalgamation or transfer of business, the said transferor shall pass on the unutilized ITC in his electronic credit ledger to the transferee.

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