Input Tax Credit under GST - How to Claim, What is ITC

Input Tax Credit (ITC) is a mechanism under GST (Goods and Services Tax) that allows taxpayers to claim credit for the taxes paid on their purchases, which they can use to offset their tax liability on their sales. In simpler terms, it means that if a registered person pays tax on their inward supplies (i.e., inputs such as goods or services), they can use this tax paid as a credit while paying tax on their outward supplies (i.e., sales).Let's consider a simple example to understand this concept better. Imagine you are a furniture manufacturer in India who purchases raw materials worth Rs. 1,00,000, subject to a GST rate of 18%. This means that you pay an additional Rs. 18,000 as tax. Later, you sell the finished goods for Rs. 1,50,000 and levy a GST of 18%, which amounts to Rs. 27,000. This GST collected from your customers is a liability that must be paid to the government. However, you can reduce the liability by utilizing the input tax credit you received on the purchase of raw materials, which in this case is Rs. 18,000. Therefore, you would only have to pay the remaining balance of Rs. 9,000 to the government.

The electronic credit ledger ismaintained for each registered person on the common GST portal and every claim of input tax credit is to be credited to this ledger.

Eligibility

To claim input tax credit, it is essential for the individual to be registered under GST, and the inputs for which the credit is being claimed must have been utilized for business purposes. At what point is it necessary for an individual to register themselves? Registration has to be obtained when it exceeds the turnover criteria.

However, there are some exceptions to this enhanced exemption limit of Rs 40 lakhs. This limit does not apply to

1. Service providers
2. persons engaged in the supply of specific goods such as ice cream, pan masala, and tobacco,
3. Person required to obtain compulsory GST registration.
4. Person who havevoluntarily registered for GST.
5. And persons engaged in making intra-state supplies in certain states such as Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura, Uttarakhand, and special category states.

It is important to note that even if a person's turnover is below the threshold limit, they can voluntarily register for GST. This is particularly beneficial for businesses that operate in the B2B (business-to-business) segment as it allows them to claim input tax credit on the GST paid on their purchases.

Some taxable persons who do not qualify for GST registration under the aggregate turnover criteria should mandatorily obtain GST registration if they satisfy any of the following criteria:

• Supply of digital content, such as e-books, music, videos, and software;
• Provision of online gaming services;
• Supply of advertising services on the internet;
• Supply of cloud services and storage;
• Provision of online news and information services;
• Supply of online marketplaces and platforms that allow customers and vendors to interact and engage in transactions.

• Persons making any inter-state taxable supply Interstate supply pertains to the movement of goods or services between two states in India, where the location of the supplier and the place of supply are situated in different states. Furthermore, exports or imports of goods or services, or the supply of goods or services to or by a Special Economic Zone (SEZ) unit, are also considered as interstate transactions.
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• Casual taxable persons making taxable supply A casual taxable person under GST (Goods and Services Tax) refers to an individual or business entity that occasionally supplies taxable goods or services in a taxable territory where they do not have a fixed place of business. Registration of a casual taxable person shall be valid for 90 days, further one time maximum extension of 90 days can also be granted
• Persons required to pay tax under reverse charge Under GST, for most goods and/or services, the liability for payment of tax rests with the supplier. Under RCM, the liability to pay tax on a supply of goods or services is shifted from the supplier to the recipient of the goods or services. In other words, the recipient of the goods or services is responsible for paying the GST to the government, instead of the supplier.
• Non-resident taxable persons making taxable supply NRTP stands for Non-Resident Taxable Person under the GST (Goods and Services Tax) regime in India. NRTP refers to any person or business entity that is not a resident of India but is engaged in the supply of goods or services in India.
• Persons Required to deduct tax under GST As per Section 51 of the GST Act, the government has the power to require certain entities, such as departments or establishments of the central or state government, local authorities, governmental agencies, or a specific category of persons, to deduct a 1% tax from the payment made or credited to the supplier if the total value under a contract exceeds Rs. 2.5 lakhs. These entities, referred to as "deductors," must obtain GST registration as a mandatory requirement.
• Persons who make taxable supply of goods or services on behalf of other persons Individuals or entities, such as agents, brokers, dealers, etc., who make taxable supplies of goods or services on behalf of others are required to obtain GST registration as a mandatory requirement.
• Input Service Distributor An Input Service Distributor (ISD) is a person or business entity that receives invoices for the supply of input services and distributes the credit of tax paid on these services to its eligible units.Under GST ( Goods and Services Tax ) law, the ISD is an office or a branch of an organization that receives input services and distributes or apportions the tax credit to other branches or units of the same organization. The credit distributed by the ISD can be used by the other units to offset their tax liability.
• Electronic Commerce Operator An Electronic Commerce Operator (ECO) is a business that operates a digital or electronic platform for facilitating the supply of goods or services between multiple vendors and customers. Under GST (Goods and Services Tax) law, ECOs are required to collect and deposit tax on supplies made through their platform, and are also required to file periodic returns. Examples of ECOs include e-commerce marketplaces, online service aggregators, and other digital or electronic platforms that facilitate the supply of goods or services between vendors and customers.
• Persons supplying online information and database access or retrieval services (OIDAR) OIDAR services are defined as services that are delivered over the internet or an electronic network, and the nature of which renders their supply essentially automated and involving minimal human intervention. Examples of OIDAR services include:
• Persons who supply goods or services through electronic commerce operators Any individual or business who supplies goods or services through an electronic commerce operator (ECO) may be required to collect and deposit tax on behalf of the supplier. In such cases, the person acting on behalf of the supplier is required to obtain GST registration. Additionally, the government may specify categories of services provided by ECOs that are liable for taxation, and the ECOs will be required to pay the tax amount as specified by the government.
• Persons Having Service Tax or VAT or Central Excise Registration All person who, on the day immediately preceding the appointed day having a service tax or VAT or central excise license under the existing law shall register under GST. Hence, migration to GST applies for all taxable persons having an existing registration.
• Transferee or Successor of a Business Any person represents as a transferee or a successor of a business, carried on by a person registered under GST shall register under GST with effect from the date of such transfer or succession.

ITC can be availed if the registered person has any of the following documents

• Amount of tax charged
• Description of goods and services
• Total value of goods and services or both
• GSTIN of the supplier and recipient
• And Place Of Supply

• Tax Invoice, debit notes, bill of entry in case of import of goods, Input Service Distributor invoice or input service distributor credit note or any document issued by an input service distributor
  Also, the above documents must have the following information
• The person availing ITC must have received all the goods / services and incase of instalment ITC shall be availed only on the receipt of the last lot of goods.
• GST should have actually paid to the government.
• The registered person availing ITC should have filed the return.
• Payment of invoice should have been made within 180 days

If the registered person fails to make the payment within 180 days from the date of issue of invoice, then such credits shall be added to the output tax liability as per applicable interest.However subsequently when the payment is made to the supplier the registered person can re avail the credit. Incase of capital goods if Input tax credit is added to the cost of asset and depreciation is claimed on the tax invoice then ITC cannot be claimed. To claim ITC the GST portion of the asset need not be added to the cost.

Under GST Act there are certain restrictions and prohibitions on availing ITC. That means on few input goods or capital goods or services ITC cannot be claimed even though it has been used or intends to be used in the business and that has been referred as BLOCKED CREDIT.Let’s get an understanding of what is blocked creditBlocked credit as defined in the ACT is a provision which restricts every registered person to avail input tax credit on selected purchases of goods / servicesFollowing is the exhaustive list of blocked credit

1. Further Supply of such motor vehicles
2. Transportation of passenger
3. Training on Driving such motor vehicles
4. Vessel / Aircraft

1. Further Supply of such Vessel or Aircraft
2. Transportation of passenger
3. Training or navigation such vessels

1. Motor Vehicle For transport of passenger having seating capacity of 13 or less than 13 (including the driver) is blockedEXCEPT,When such motor vehicle is used for
2. Vessels and Aircraft ITC paid on Vessels and Aircraft shall not be allowed even if such vessels and aircrafts are used in the furtherance of business.EXCEPT,When such vessels and aircraft is used for
3. Services of General Insurance, servicing, repairs and maintenance is allowed only if the credit is allowed on the above vehicles.
4. Following services credit shall be blocked on case offood and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred above
   except when such services are availed for further outward supply of the same category or as an element of taxable or composite supply
5. Membership of a club, health and fitness center, andTravel benefits extended to employees on vacation such as leave or home travel concession.
   Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
6. Goods and services for personal use
7. Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
8. ITC (Input Tax Credit) will not be available in cases where tax was paid due to non-payment or short payment of tax, excessive refunds were utilized or availed with the intent of fraud, wilful misstatement or suppression of facts.

A registered person can claim ITC early of the following two datesDue date of filing of return for the month of September of the succeeding financial yearOrThe date of filing Annual Return of GSTR 9 with respect to that financial year.Let's discuss the availability of credit under specific circumstances

• Inputs held in stock
• Inputs contained in finished goods or semi finished goods held in stock and
• On capital goods.

• Inputs held in stock
• Inputs contained semi-finished or finished goods held in stock relatable to such exempt supply
• On capital goods exclusively used for exempt supply

• Yes, John shall be eligible to claim ITC on the capital goods, semi finished goods and finished goods as on 19th October

• Where a composition taxable person becomes a regular taxable person A composition dealer is a small taxpayer who has opted for the Composition Scheme under GST. Under this scheme, the taxpayer is required to pay a lower rate of tax on their turnover without availing any input tax credit (ITC).If a composition dealer wants to switch to the regular taxable person scheme, they can do so by filing an application in Form GST CMP-04. Once the application is approved, the taxpayer will be considered as a regular taxable person and can start availing ITC on their purchases of goods or services.He shall be entitled to claim input tax credit in respect of
• On the day immediatelypreceding the date from which the composition dealer became liable to pay taxLet us understand this with an example Question: John a registered person, was paying tax under composition scheme upto 10th October, however on 11th October he became liable to pay tax under regular scheme. Will John be eligible to take ITC on capital goods, semi finished goods and finished goods? Answer: Yes, John shall be eligible to claim ITC on the capital goods, semi finished goods and finished goods as on 10th October
• Exempt Supply becoming Taxable Supply Input tax credit is the credit that a registered person can claim for the tax paid on inputs used in the course of business. The ITC can be claimed on inputs, input services, and capital goods. However, it is important to note that ITC can only be claimed if the inputs have been used or intended to be used for making taxable supplies.In the case where the goods were previously exempt from tax, the ITC on those goods may not have been claimed in the past. However, once the goods become taxable, the registered person can claim ITC on such goodsSuch goods shall comprise of
• On the day immediately preceding the date from which such supply becomes taxable.However, credit on such capital goods shall be reduced by such percentage points as may be prescribedLet us understand this by an exampleJohn a registered person, was supplying exempted goods, however on 20th October the said supply becomes taxable. Will John be eligible to claim Input Tax Credit on Goods, Semi-Finished Goods and Finished Goods in stock and Capital Goods

The Input tax credit claimed above for inputs held in stock or for semi finished goods or finished goods or capital goods shall be subject to the following conditions namely

• ITC on Capital Goods shall be reduced by 5% per quarter or part thereof. The Input Tax Credit on capital goods shall be claimed after reducing the tax paid on such Capital Goods by 5% per quarter of a year or part thereof from the date of the invoice or such other documents on which Capital Goods were received by the taxable person
• Registered Person to file a declaration in GST ITC 01 within 30 days of becoming eligible to avail ITC. The registered person shall within a period of 30 days from the date of becoming eligible to avail the input tax credit above shall make a declaration electronically on the common portal in FORM GST ITC 01 to the effect that he is eligible to claim ITC
• Declaration certified by a Chartered Accountant. The details furnished in FORM GST ITC 01 shall be duly certified by a practicing Chartered Accountant / Cost Accountant if the aggregate value of the claim exceed two lakh rupees.
• No Input Tax Credit in respect of invoices older than one year. A registered person shall not be entitled to take Input Tax Credit in respect of any supply of goods / service / or both after the expiry of one year from the date of issue of invoice relating to such supply.

Following are the amendments introduced in the Finance Bill 2023, however the said amendment shall come into force once notified by the CBIC.

1. Allowing person registered under composition scheme to sell goods through electronic commerce operator.
2. Under section 16 where the supplier fails to pay the invoice value within 180 days the said input tax credit availed by him shall be paid by him. The said amendment is more of a clarification as before amendment the wordings were that it shall be added to the output tax liability and with the amendment the government makes sure that the said tax shall be paid along with the interest.
3. Restriction with respect to availment of input tax credit for warehouse goods to any person before clearance of home consumption, by including the value of such transaction in the value of exempt supply.
4. ITC shall not be availed for goods or services or both which are intended to be used to fulfil the obligation of corporate social responsibility.
5. Maximum time limit for furnishing their return of GSTR-1, GSTR-3B, GSTR-9 and GSTR-8shall be maximum three years from the due date of furnishing the details.

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