Input Tax Credit

What is GST?

Goods and Services Tax (GST), is a tax that customers have to bear when they buy goods or services, such as movie tickets, clothes, electronics, transportation, travel, items of daily use, etc. It is an “Indirect Tax”, i.e., this tax is not directly paid by customers or consumers to the government, but is rather levied on the manufacturer or producers or seller of goods and the providers of services. The sellers usually add the tax expense into their costs, and the price the customers pay is inclusive of GST.

Different components of GST

1. Central GST (CGST): GST paid on each transaction is divided into two equal parts. One part for the Centre popularly known as CGST.
2. State GST (SGST): The other part is the state’s share of GST, when a transaction takes place within the state, popularly known as SGST.
3. Union Territory GST (UGST): When a transaction takes place within a union territory (UT) without a legislature, the part of GST that the UT gets popularly known as UGST.
4. Integrated GST (IGST): When a transaction takes place between two states/UTs or between a state/UT and any foreign territory, IGST is levied without any bifurcation on the applicable GST rate.

What is Input Tax Credit?

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 simple words, businesses can reduce their tax liability by claiming input tax credit to the extent of GST paid on purchases.

Let us take an example to understand the concept of Input Tax Credit. Suppose Mr. Ram is running his clothes business in Haryana and he acquires clothes from different manufacturers and sells the clothes after some modification in it to his customers. The tax which he has paid on acquiring clothes will be allowed him as input tax credit while paying his gross liability.

Let us take another example to understand the concept of an input tax credit-

Let suppose you are a manufacturer-

Tax payable by you on output is Rs.1000

Tax paid by you on input is Rs.600

Then, you can claim Input Credit of Rs.600 and you have to deposit only Rs.400 as your tax liability.

Section 16 of the CGST Act,2017 governs the provision related to Input Tax Credit.

Section 16(1),

• A registered person is entitled to take Input Tax Credit.
• Credit is available subject to certain conditions and restrictions.
• Credit is to be availed in the manner and time as specified in Sec 49 of the CGST Act.
• Input Tax Credit is available for the supply of goods and/or services used for the furtherance of business.
• Input Tax Credit shall be credited to the electronic credit ledger of a registered person.

        Electronic Credit Ledger is the input tax credit ledger (CGST/SGST/IGST/UTGST) in the electronic form which is maintained          at the common portal for each registered taxable person.

Section 16(2), an Input tax credit is available only if-

• Tax Invoice or debit note issued by your supplier of goods or services is available.
• Received goods and/or services.
• The tax has been actually paid to the government through cash ledger or credit ledger of the supplier.
• The return has been filed u/s 39. Every registered person is required to file monthly GSTR-3B return u/s 39.

First Provision to Section 16(2):

In case the goods covered under an invoice are not received in a single consignment but are received in lots/installments. ITC can be taken only upon receipt of the last lot or installment.

Second Provision to Section 16(2):

To the registered person, where a recipient fails to pay to the supplier of goods or services or both (other than the supplies on which tax is payable under reverse charge mechanism), the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon. Interest shall be paid @ 18% from the date of availing credit till the date when the amount added to the output tax liability is paid.

This provision will not be applicable under the following conditions:

• Supplies on which tax is paid under Reverse Charge Mechanism.
• Deemed supplied without consideration.
• Additions made to the value of supplies on account of supplier’s liability, in relation to such supplies, being incurred by the recipient of the supply.

Section 16(3), Input tax credit Not Allowed

To the registered person, if depreciation claimed on the tax component of the capital goods and plant and machinery, under the provisions of Income Tax Act,1961.

Section 16(4), Input tax credit Not Allowed

Input Tax Credit or debit note pertaining to any Financial Year can be availed any time-

• Till the due date of filing return for the month of September of the succeeding Financial Year, or
• The date of filing of the relevant Annual Return

        Whichever is earlier.

        However, the time limit provision given u/s 16(4), would not apply on a claim for re-availing of credit that has been                    reversed earlier.

General Conditions for taking Input Tax Credit:

A business can avail input tax credit if the following conditions get fulfilled-

1. He has a GST Invoice.
2. His supplier has uploaded the GST invoice on the portal.
3. His supplier has paid the amount of GST to the government.
4. GST returns have been filed by his supplier.

However, a business under composition scheme cannot avail the input tax credit.

Documents required for availing input tax credit

Following documents are required for availing Input Tax Credit-

1. An Invoice issued by your supplier of goods or services.
2. Invoice issued by you as a recipient of goods and services supplied by an unregistered dealer. Such a supply comes under the reverse charge mechanism. This mechanism involves supplies made by an unregistered person to a registered person. 
3. A Debit note issued by your supplier in case the tax charged in an invoice is less than the tax payable in respect of such a supply.
4. A Bill of Entry or any similar document as required for an integrated tax on imports.
5. An Invoice or Credit Note issued by an Input Service Distributor as per the rules under GST.
6. A Bill of Supply issued by a dealer opting for composition scheme or an exporter or supplier of exempted goods.

The Bill should contain at least the following details-

1. Amount of tax charged.
2. Description of goods or services.
3. The total value of the supply of goods or services or both.
4. GSTIN of the supplier and recipient.
5. Place of supply in case of inter-state supply.

Reversal of Input Tax Credit

A certain situation where input tax credit availed need to be reversed-

1. Fails to pay the invoice amount to your supplier within 180 days from the date of issue of invoice by the supplier.
2. Use goods and services for personal use.
3. Utilize goods and services for producing exempt supplies.
4. Make use of capital goods for personal use.
5. Sell capital goods and plant and machinery.
6. Switch from normal mechanism of GST to composite Levy.