‘Input Tax Credit’ is the reversal of the tax to a taxpayer, who has paid such tax on any goods or services that he utilized in his business.
In other words, a taxpayer can claim the credit refund for the GST that he paid while buying any goods or services in the direct interest of their business.
Input Tax Credit under GST or ITC thus becomes a crucial element for all businesses, since it is one of the factors to determine the final tax liability.
Thus businesses must be very careful about their ITC while accounting to avoid the loss of capital in the form of extra tax payment.
As a business or an accountant, you must be aware of all about ITC under GST such as its rules, utilization, eligibility, and the ineligibility to claim ITC, etc.
In this article, we cover all this & additionally a few detailed & unknown facts about ITC under GST, that you probably missed out.
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What is ITC under GST?
The phenomenon of claiming input tax credit or ITC under GST is of high value for a business to ensure that they don’t pay repeated tax for any goods or services. Now, what does this mean?
Let us see what this means with an example to understand better & easier-
Mr. Mehra buys processed & dyed silk material worth Rs. 50,000 at a GST rate of 5% (Total cost paid- 52500 including GST) for his cloth boutique.
Since Mr. Mehra is using the material for his business, he can claim the credit of Rs. 2500 by mentioning the same in their GSTR-3B.
He then sells his finished goods for Rs. 80,000 at a tax rate of 12%, his total tax liability for the same tax period becomes Rs. 9600.
Now since he already paid Rs. 2500 as input tax, he can utilize his credit & reduce that amount while paying the outward tax liability while filing his GSTR-3B for that month.
Meaning he will only have to pay an adjusted amount of Rs. 7100 as their outward tax liability.
Working- Now, the major question here is how does ITC work while filing the GST returns?
Here is a simple explanation- First, Mr. Mehra’s supplier will file their GSTR-1 & declare the details of the sale he made to Mr. Mehra in the same.
The details filed by the supplier in their GSTR-1 will reflect in Mr. Mehra’s GSTR-2A.
Mr. Mehra will then file their GSTR-3B using their GSTR-2A & GSTR-1, where he will calculate his actual tax liability, his input tax credits as per GSTR-2A, & then the final adjusted tax liability payable.
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How to utilize Input Tax Credit under GST?
When you claim the ITC under GST you will not receive any actual credits. The ITC will be deposited to your Electronic Credit ledger which you will only be able to use to pay the GST liabilities.
Once the credits in the electronic credit ledger are exhausted, then you will have to pay the tax liability through your electronic cash ledger.
Note- You cannot utilize the ITC to offset the penalties, late-fees & interests. These liabilities can only be paid in cash & not credits.
Now, GST is paid by you in three forms, namely-
IGST- Integrated GST
CGST- Central GST
SGST- State GST &
UTGST- Union Territory GST
As per the rule, specific GST credit can be used to offset a specific GST liability type only.
For example, CGST credits can only be used to pay CGST liability primarily, and then balance, if any, can be utilized to pay the IGST. So, you cannot utilize the CGST credit to release SGST/UTGST liabilities.
The following table illustrates all the combinations in which you can utilize your credits-
| S. No. | Credit type | Primary Utilization | Secondary Utilization |
| 1. | CGST | CGST | IGST (cannot be utilized for SGST/UTGST) |
| 2. | IGST | IGST | CGST, then SGST/UTGST |
| 3. | SGST/UTGST | SGST/UTGST | IGST |
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Provisional Input Tax Credit & the new 10% ITC rule
On October 9th, 2020, CBIC entered a sub-rule(4) under rule no. 36 of the CGST rules 2017. The rule stated that a taxpayer will only be allowed to claim a provisional credit of 10% of the eligible ITC.
Now, what does this rule mean?
Provisional credit is the credit of invoices missing in the GSTR-2A (maybe because the supplier didn’t file their return or didn’t declare the sale in their return).
Earlier, a taxpayer was allowed to claim 100% provisional credit even if the invoices for the same were missing in GSTR-2A.
This however changed from January 2020, when the provisional credit was capped to 10% of the total eligible ITC.
Example-
For the month of April, Mr. Khan is eligible for ITC of Rs. 60,000 as per his purchase records.
But at per his GSTR-2A, he is only eligible for Rs. 40,000, upon reconciling the two, he finds out that 5 of his suppliers have not filed their GSTR-1 for April, and hence the invoices of those suppliers are missing in Mr. Khan’s GSTR-2A.
So as per the new rule, Mr. Khan can claim the amount of Rs. 40,000 & additionally as provisional credit he can only claim 10% of the total eligible ITC- Rs. 4000.
So, for April, Mr. Khan can claim a total of Rs. 44000 as Credit (including both ITC & provisional credit).
Check : GST Interest Calculator
Clearly, he is at a loss, since he lost Rs. 16000 worth of PC, which he will only be able to claim when all his suppliers file their GSTR-1 return & mention the invoices correctly in the same.
This rule was implemented with the sole motive to prevent tax evasion & decrease the number of false or incorrect credit claims.
Although, looking at the current situation with the pandemic & the lockdown, the government has decided to take down the 10% ITC rule, from February 2020 to September 2020.
Now, taxpayers can claim full ITC & PC (provisional credit) for all months from February 2020 to September 2020.
Claim 100% ITC & PC with GSTHero’s advanced reconciliation tools, with features like, notifying the defaulting suppliers & matching the mismatched invoices automatically.
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Applicability of refund of ITC- Eligibility & Ineligibility
In order to claim Input Tax Credit under GST, all taxpayers are required to meet the following conditions, only then will such taxpayers be considered eligible to claim input tax credit-
- The 180 days payment rule- This rule obligates the recipient to make the payment to the supplier within 180 days from the date of the invoice creation. If the recipient has claimed the credit on such invoices & ha failed to make the payment within 180 days, then the ITC claimed will be converted to tax liability & additional interest will be charged on the same.
- The recipient should receive the goods physically.
- The recipient must possess, any document addressing the payment such as invoices & challans, etc.
- The supplier must furnish their returns & declare all the related invoices in the same
- The supplier should pay the GST received from the recipient to the government.
- The goods can be sent to another person on the direction of the recipient using a transfer document
- Where the goods & services are received in installments, you will only be able to claim the ITC when the final installment has been received by you.
If a taxpayer has met all the conditions mentioned above then he will be eligible to claim & utilize the ITC.
Although there are some cases where the ITC is blocked or not granted to the taxpayer, such ITC is called ineligible ITC. The Government has specified a list of cases & scenarios where the ITC remains blocked.
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We have mentioned most of the cases & scenarios below, where the Input Tax Credit is blocked-
1. ITC on purchase of Motor vehicles and conveyances (for personal use, a motor vehicle with seating capacity up to 13 persons, purchase of aircraft & vessels.
2. General insurance, servicing, repairs, and maintenance of vehicles & vessels
3. Supply of food, beverages, club memberships, beauty treatment, surgery, etc for personal use or office parties
4. Membership of a club, Gym, Beauty club, health, and fitness center
5. Travel for personal or business purposes where LTA is provided to the employees
6. Working Contract (for construction of properties)
7. Construction of immovable property for personal use
8. Purchase from Composition Scheme
9. Good & Services received by a Non-resident
10. Goods & Services for Personal Consumption
11. Free Samples, gifts, lost stolen and destroyed goods
12. ITC availed by means of a fraud or scam
Check: GST Input Tax Credit Calculator
Unknown Facts about ITC Mechanism under GST
Up until now, we have covered all the major aspects of ITC under GST, its working, utilization, eligibility, & blocked credits cases.
But ITC is a highly significant provision of GST. It saves your working capital by avoiding the double or extra payment of taxes. Amid all the chaotic times, extra tax payment is a loss that no business would want to bear.
Hence it becomes important for businesses to have a diverse perspective to look at the different angles that influence the Input Tax Credit.
So given below are some tips, facts & points that you can not while claiming Input Tax Credit under GST-
1. Thorough Reconciliation- This is the most important aspect of reconciliation & and not as unknown a fact for businesses & accountants. All businesses & accountants must ensure that their reconciliation is highly deep & thorough to void the loss of credits. Although the matching of invoices especially in high volumes can be a very difficult task, may consume time & efforts and yet may not be accurate. You can try GSTHero’s Advanced Reconciliation Tools for reconciling your returns & records easily, faster & more accurately. GSTHero is the preferred choice of businesses & accountants for its highly technology-driven & systematic design.
2. Notifying the GST defaulting suppliers- When you reconcile the data make sure to follow up with your supplier regarding any missing invoices or changes since you cannot make changes to GSTR-2A
3. Claiming only eligible credits- Make sure that you don’t claim the blocked credits as they later attract interests & penalties.
Read Also: GSTR-3B : 10 common mistakes every taxpayers should avoid
4. ITC on Nil rated Supplies- You cannot claim ITC on nil rated supplies, since the supplies were nil rated, no taxes were paid hence there will be no refund of credits
5. ITC carry-forward- If your ITC balance is more than your tax liability you can either carry-forward the remaining ITC in the next tax period or claim a refund of the same.
6. ITC on Capital Goods & Assets- You can claim ITC on capital goods & assets if you have not claimed its depreciation already.
7. ITC on reverse charge mechanism- The GST paid under RCM or reverse charge mechanism can be claimed as ITC by the recipient, not the supplier.
8. ITC on advanced payment- Even though under advanced payment the tax is paid earlier the ITC for the same can only be claimed after the issuance of the tax invoice & receiving of the goods.
9. SGST utilization- The ITC of SGST can only be used to release the tax liability of the same state & not any other state. For example, ITC of SGST paid in Maharashtra cannot be utilized to pay the SGST of Gujarat.
10. ITC on goods & services utilized for both business & personal use- In such conditions where the goods or services are used for both personal & business use, partial ITC can be claimed by the taxpayer as defined in the ITC rule.
11. The transition from Provisional Credit to ITC- When you claim the provisional credit on a missing invoice, & when that missing invoice is declared by the supplier you will have to enter a reversal of the PC & claim of ITC in your returns & registers (no actual transactions will take place, this is to avoid confusions & double claiming of credits)
About the Author– GSTHero– Making GST Simple! GSTHero is the best GST filing, e-Way Bill Generation& E-Invoicing Software in India. GSTHero is a government authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9 and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation & report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero.
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