When a registered person purchases goods or avails services, GST is paid on such inward supplies. These supplies are used for furtherance of business and the outward supplies are made. On such outward taxable supplies, GST is collected from the recipient. The total GST collected on outward supplies will not be payable to the Government in entirety, but it will get reduced on account of adjustment of tax paid on inward supplies, subject to certain conditions. This mechanism in which tax paid on inward supply is adjusted towards tax paid on outward supply is known as Input Tax Credit (ITC). The GST laws provide the benefit of ITC not only on input goods/services but also on capital goods. This ITC available reflects in the electronic credit ledger of the tax-payer maintained at the GST common portal. In this chapter, we will discuss the various aspects of ITC like conditions, circumstances, manner of computation, reversal etc.
1. What is Input Tax Credit?
Input Tax Credit (ITC) is basically the credit which is received by a taxpayer after paying input tax. These inputs act as building blocks of goods and thus the tax paid on them is credited to the taxpayers in due time under given conditions. Availing ITC or its refund helps determine the accurate working capital at any point. This information is extremely crucial from the standpoint of business liquidity.
ITC can only be claimed under GST if its conditions are followed properly. ITC is the backbone of GST and a very important subject for registered taxpayers. Thus, its eligibility is also a matter of concern for them. Next we’ll know what are the conditions to be fulfilled to avail input tax credit .
2. ELIGIBILITY FOR TAKING INPUT TAX CREDIT AS PER SEC 16(20):
Goods and Services Tax (GST) has made conditions for claiming ITC Input Tax Credit (ITC) a lot simpler. However, there are certain conditions of input tax credit which must be fulfilled before claiming Input Tax Credit (ITC).
1. Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
2. Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,–
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39.
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty 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, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon
3. Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed
4. A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
3. Situations when ITC Cannot Be Claimed
Input Tax Credit (ITC) cannot be claimed if condition for claiming ITC Input Tax Credit are not met. However, there are other situations when ITC is unavailable. These are:
- For conveyance and motor vehicles, except:
(I) Ones which are being supplied
(II) Ones used for transporting goods or passengers
(III) Ones used for training purposes
(IV) Ones used to deliver services or goods in same category or composite supply
- Membership sale for clubs, fitness centers, etc.
- Renting cabs and life/health insurance, except when made obligatory by government to be provided by employers to employees
- Employee travel benefits on vacation such as leave, home travel concession, etc.
- Service of works contract to construct immovable property except for:
(I) Providing further supply of service under works contract
(II) Supplying plant and machinery items
- Goods and services to construct immovable property for personal or business use
- When tax has been paid under composition scheme for the goods and services
- Goods and services for personal use
- Apart from imports, any good or service received by a non-resident taxpayer
- Goods which are lost, stolen, written off, destroyed, or gifted as free samples
- Frauds like excessive refund on ITC availed, wrong statements made on purpose, facts suppressed, goods confiscated or seized.