Input Tax Credit (ITC) under GST !!!

One of the fundamental features of GST is the seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country.

Input Tax Credit under GST is a credit which is available to supplier to set off the taxation he has paid on purchase of goods from output tax on sale of such goods. Hence, the tax will levy on the value added which results in avoiding double taxation.

Input Tax in relation to a taxable person, means the tax charged on any supply of goods and/or services to him which are used in the course or furtherance of his business, but does not include the tax paid under the Composition levy.

How does ITC work?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Here’s how:

When you buy a product / service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax from buyer. Now you can adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism of such adjustment of already tax paid at time of purchase is called utilization of input tax credit.

For example - Suppose you are a manufacturer and you have tax payable liability on sale of final product of Rs. 450 and you have already paid tax of Rs. 300 on purchase of input / raw material. Now you can claim INPUT CREDIT of Rs. 300 paid at time of purchase and you only need to pay tax of Rs. 150 i.e. ( Rs. 450 - Rs 300 - ITC)

Eligibility for Input Tax Credit under GST

A person will be entitled to Input Tax Credit under GST in respect of inputs held in stock  or in semi finished state immediately preceding the date of which he becomes liable to pay tax, if he has applied for new registration.

Voluntary registration can be taken by any person. He can pay tax even when his turnover is less than the specified limit. He can take Input Tax Credit under GST in respect of the goods which are held in stock on the day immediately preceding the registration date.

If a person who has opted for composition scheme switches over to the normal scheme, then he shall be entitled to take Input Tax Credit under Goods And Service Tax in respect of “goods held in stock” on the day immediately preceding the date when he becomes liable to pay tax as normal taxpayer.

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as prescribed:-

The dealer should be in possession of tax invoice

The said goods/services have been received

GST Returns have been filed.

The tax charged has been paid to the government by the supplier.

When goods are received in installments ITC can be claimed only when the last lot is received.

No ITC will be allowed if depreciation has been claimed on tax component of a capital good

A person registered under composition scheme in GST cannot claim ITC.

Order of Utilization of ITC:

The order of utilization of ITC (Input Tax Credit) has undergone a lot of changes in the recent past.

There are 3 phases for the same:

1st phase (w.e.f. 01.07.2017 to 31.01.2019) :-

Section 49(5) of CGST Act 2017 provides the order of utilization of ITC.

It provides that -

1. IGST ITC has to be first used for payment of liability under IGST, then CGST &then SGST.

2. CGST ITC has to be first used for payment of liability under CGST and then IGST.

3. SGST ITC has to be first used for payment of liability under SGST and then IGST.

4. CGST and SGST ITC can’t be set off against each other.

2nd phase (w.e.f. 01.02.2019 to 31.03.2019) :-

After insertion of section 49A and 49B, the ITC on account of IGST has to be utilized first before ITC of CGST/SGST can be utilized for discharge of any tax liability.

3rd phase (w.e.f 01.04.2019 onwards) :-

Rule 88A under CGST Rule 2017 has been inserted w.e.f. 01.04.2019 which provides that :-

1. IGST ITC has to be first utilized for payment of IGST liability, and

2. The remaining balance of IGST ITC can be used towards payment of CGST/SGST liability in any order.

Utilization of Provisional ITC :-

The CBIC released an important notification on 9th October 2019, inserting sub-rule (4) under Rule 36 of the CGST Rules, 2017. The rule states that the provisional tax credit (without invoices on GSTR-2B) can be claimed in the GSTR-3B to the extent of 5% of eligible ITC reflected in the GSTR-2B. (Further amended with effect from 1st Jan 2021) 

Hence, the total ITC that can be claimed in GSTR-3B is 105% of the eligible ITC appearing in the GSTR-2B of a particular period. The circular 123/2019 clarifying the issues relating to the implementation of original rule 36(4) was released on 11th November 2019. 

Reversal of Input Tax Credit:

ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed

Apart from these, there are certain other situations where ITC will be reversed.

ITC will be reversed in the following cases-

1) Non-payment of invoices in 180 days – ITC will be reversed for invoices which were not paid within 180 days of issue.

2) Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.

3) Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.

4) Capital goods partly for business and partly for exempted supplies or for personal use – This is similar to above except that it concerns capital goods.

5) ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.

The details of reversal of ITC will be furnished in GSTR-3B.

Reconciliation of ITC

ITC claimed by the person has to match with the details specified by his supplier in his GST return. In case of any mismatch, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR-3B.