The reduction of Input Tax Credit value from GST payable on sales is subject to certain conditions. These conditions, as per GST law, are largely consistent with the pre-GST regime, with a few additional requirements like GSTR-2B. These rules are straightforward and can be stringent.
What is an Input Tax Credit?
Input Tax Credit (ITC) refers to the central tax (CGST), state tax (SGST), integrated tax (IGST), or cess that is paid by a person with GST registration on the supply of goods or services. This encompasses taxes paid on a reverse charge basis and IGST charged on imported goods. However, it does not include taxes paid under the composite taxation scheme.
Businesses pay input tax when making purchases, and this tax can be utilized to offset tax liabilities when making sales. The taxation is based on the value added at each stage of the supply chain until the final consumer is reached.
Input Tax Credit plays a pivotal role in the Goods and Services Tax (GST) system by preventing double taxation and mitigating the cascading effects of taxes.
For instance, when an individual procures raw materials for product manufacturing, they incur a specific tax known as input tax. Subsequently, when they sell the finished goods created from these raw materials, referred to as output, they can claim a tax credit equivalent to the tax paid to the supplier or vendor. As a result, they are only responsible for paying the remaining tax liability. This mechanism helps avoid redundant taxation and ensures a fair tax system.
Eligibility Criteria for Claiming Input Tax Credit
ITC can be claimed by a person registered under GST if they meet the following conditions:
GST Registration and GSTR 2 Filing: The claimant must be a GST-registered person and should have filed the GSTR-2 returns.
Possession of Tax Invoice or Debit Note: The person should possess a valid tax invoice or debit note issued by the supplier of goods or services.
Receipt of Goods or Services: The goods or services (or both) should have been received by the claimant.
Supplier's GST Payment: The supplier must have paid the GST charged on the supply to the government.
Input Tax Credit in Installments: If goods are received in installments, ITC can only be claimed when the final lot is received.
No Depreciation on Capital Goods: ITC cannot be claimed on the tax component of capital goods if depreciation has been claimed on it.
Tax & Process
The following prerequisites are essential for claiming Input Tax Credit (ITC) under GST:
GST Registration: The individual must be registered under GST.
Valid Tax Invoice or Debit Note: A tax invoice or debit note issued by the registered supplier that reflects the tax amount.
Receipt of Goods or Services: The goods or services should have been received.
Supplier's Return and Tax Payment: The supplier must have filed returns and paid the tax to the government.
ITC on Installments: If goods are received in parts or installments, ITC may be claimed upon receiving the last lot or installment.
Depreciation on Capital Goods: ITC cannot be claimed if depreciation on the tax component of capital goods has been availed.
Timely Claim: The ITC should be claimed within the prescribed time.
How to Claim Input Tax Credit:
To claim an Input Tax Credit (ITC), regular taxpayers need to follow these steps:
Report in GSTR 3B: Report the ITC amount in the GSTR 3B return.
Provisional Basis: Taxpayers can provisionally claim ITC in GSTR 3B up to 20% of the eligible ITC as reported by the supplier in the auto-generated GSTR 2A return. It's crucial to verify the figures in GSTR 2A before proceeding with GSTR 3B.
Note: Starting from October 9, 2019, taxpayers can claim only 20% of the eligible ITC available in GSTR 2A as provisional ITC.
This means that the input tax credit amount reported in GSTR 3B will be the sum of the actual ITC in GSTR 2A and the provisional ITC (which is 20% of the eligible ITC in GSTR 2A). Accurate reconciliation between the purchase register and GSTR 2A becomes essential.
As a registered taxable person, you can claim an Input Tax Credit based on the following documents:
Invoice issued by the supplier of goods or services.
Invoice issued by the recipient of goods and services from an unregistered dealer (under the reverse charge mechanism).
A debit note is issued by the supplier when the tax charged is less than the tax payable for the supply.
Bill of entry or similar documents for recording integrated tax on imports.
Invoice or credit note issued by an input service distributor as per GST rules.
Supply bill from a dealer under the composition scheme, exporter, or supplier of exempted goods.
Can Input tax credit be claimed on lost or damaged goods?
No, a person cannot claim input tax credit for goods that are lost, stolen, destroyed, or written off. Input tax credits for goods given as gifts or free samples are also not allowed.
How can I avail ITC on goods or services used partly for business purposes?
Registered individuals can claim input tax credits for goods or services used exclusively for business purposes. The calculation of eligible input tax credit is outlined in GST rules.
What happens in case of an invoice mismatch during reconciliation?
In the event of an invoice mismatch, both the supplier and recipient will be informed about the discrepancy. If the discrepancy is not rectified, the amount will be added to the recipient's output tax liability in the return for the subsequent month.
How much Input Tax Credit (ITC) can be claimed?
A taxpayer can claim an Input Tax Credit of up to 20% of the eligible ITC reported by the supplier in the auto-generated GSTR 2A return.
Can provisional input tax credit be used for GST payment?
No, provisionally allowed input tax credit can only be used to offset self-assessed output tax liability in the return.