Input Tax Credit – Eligibility & Benefits Under GST

The taxation system in India is forever evolving. However, one of the most significant changes was made with the introduction of Goods and Services Tax, the GST. Quite comprehensive in its nature, GST includes many components, and the Input Tax Credit is an important one. As a business owner, Input Tax Credit is not just a tax formality, rather if you know how, you can make it a useful tool, which can help you streamline your taxes, and also lift the flow of cash! 

Read on as we discuss input tax credit meaning, along with the ITC claim rules that you should know. To give you a clear insight into ITC terms, we will also discuss GST ITC rules, what are the conditions for claiming ITC, who is eligible for ITC and more. 

What is Input Tax Credit (ITC) under GST?

Let us first discuss what is the input tax credit. Input Tax Credit is the GST that is paid by an individual who is a registered taxable person on the purchase of either goods or services that will be used for the purpose of business. To define input tax credit in simple words, it can be said that ITC helps reduce an individual’s GST liability. The practice is considered a positive step by business owners, as it averts the doubling of taxes and also simplifies the taxation process. 

Claiming ITC with an Example

Let’s take a look at the input tax credit under GST with example, to better understand the ITC meaning. 

Suppose Ragini Mehra is an entrepreneur. The tax payable on her output or the final product is Rs. 1000. She paid a tax of Rs. 800 on the input, that is the purchases she made. Hence, now Ragini can make an ITC claim of Rs. 800 and deposit the remaining Rs. 200 as taxes in cash.  

So, basically, the Input Tax Credit under GST allows financial benefits to all kinds of manufacturers and traders who are eligible under the GST Act. A reimbursement can be claimed on the taxes that have been made at the time of business purchases. 

Who Can Claim Input Tax Credit under GST?

There are certain factors that deicide what is eligible for ITC. These should be fulfilled by an individual/ firm for making an ITC claim. Take a look:

1. The registered firm/ individual should have a valid tax invoice
2. The mentioned goods and services must be received
3. To be eligible for the credit, it is mandatory that the supplier has paid the tax amount
4. GSTR-3B should have been filed by the recipient
5. The registered  firm/ individual needs to file and submit the return
6. The supplier should have paid the levied charge
7. The recipient has to pay the total cost to the supplier on the credit that is taken  (along with the applicable tax charges) within 180 days of invoicing
8. In case goods and services are received in instalments, the firm/ individual can claim ITC only after the last instalment is received.   

What Can Be Claimed as ITC?

Keep in mind that ITC can be claimed for business operations only. A firm/ individual is not eligible to claim ITC for goods and services that are for personal use, are exempted supplies or are supplies which do not qualify for ITC under CGST Section 17(5).

Eligible and Ineligible Input Tax Credit

As a business owner, you need to understand what is eligible for ITC and what falls under the category of ineligible ITC. You would not be able to claim all the input tax credits under GST deductions. Take note of the following credits that are ineligible for input tax credit:

1. GST that is paid on motor vehicles that are for personal use (there are certain exemptions on pre-owned and commercial-use cars)
2.  GST that is paid on food, beverages, cosmetic treatments, and medical expenses, unless legally required
3. GST paid towards gyms and club memberships
4. GST that is paid on life and/ or health insurance (unless required by the government)
5. GST that is paid on goods and services that are received by NRIs
6. GST that is paid on employee travel benefits unless it is solely for business purposes.

Documents Required for Claiming ITC

Now that you know about ITC claim rules, make note of the documents that you would need to make the GST ITC claim:

1. The invoice that is issued by the goods/services supplier
2. The debit note that is issued by the supplier, if any
3. Entry bill
4. Special invoices (issued in specific cases)
5. An invoice or credit note issued by the ISD (Input Service Distributor) under GST invoice rules.
6. Supply bill issued by the supplier for goods/ services, or both.

Input Tax Credit on Capital Goods

Let us now come to input tax credit on capital goods. The assets that are used by businesses with the aim of generating revenue are called capital goods. Under the Goods and Service Tax, taxpayers are eligible to get benefits from ITC on capital goods. Simply put, the GST that is paid on capital goods such as vehicles, tools, machinery etc, can be claimed, provided the utilization of these goods is done for business purposes only.

However, you need to keep in mind that:

• Capital goods must not treated as business expenses. They need to be recorded as assets in the account books 
• The ITC value on capital goods is reduced by 5% for each quarter from the date of the invoice.
• The tax on capital goods can not be claimed in the name of depreciation.

ITC on Job Work

There are cases where the principal manufacturer has to send the goods for further processing to a worker/ employee. For example, a garment manufacturer company sends a set of jackets to embroiders to embroider. In such a scenario, the principal manufacturer is eligible to seek credit of tax paid on the purchase of the goods that are sent.

Note: To qualify for the ITC on job work, the goods sent for job work need to be delivered back to the principal manufacturer within 1 year. This return limit is 3 years in the case of capital goods.

ITC Provided by Input Service Distributor (ISD)

ISD stands for Inpot Service Distributor, which is typically the head office, or a registeterd office of the individual under GST. the ITC is collected by the ISD on every purchase that is made. It is then distributed to the recipient offices/ branches such as SGST or UTGST/ IGST or cess/ CGST.

ITC on taxable supplies can also be claimed by banks and financial companies, provided the follow a specific method of calculation. 50% ITC claim is allowed on capital goods, inputs and input services for these bodies. This provision is made to deal with the mixed nature of taxable and exempt supplies. 

ITC on Transfer of Business

Transfer of business is applicable in case of merger or amalgamation of business. The transfer with include ITC, and will then be passed to the invidual/ firm transferring it at the time of business transfer.

Special Cases of ITC

The GST law specifies ITC claim rules in the following scenarios:

• Transactions involving capital goods
• Activities related to job work
• Claims made through an Input Service Distributor (ISD)
• Operations conducted by banks
• Cases of business transfer.

Time Limit to Claim Input Tax Credit under GST

It is important to know the time limit for claiming ITC under GST notification. This is important information laid out in Section 16(4) of the CGST Act, 2017. To avail ITC for the invoices of a given financial year, the last date would be the earlier of:

• November 30, following the end of the mentioned financial year 
• Annual Return for the mentioned financial year.

How to Claim ITC?

A union of entries on the  Invoice Management System and GSTR-2B is required for claiming ITC, with purchase register. Regular taxpayers need to report the ITC in their GST returns of Form GSTR-3B in Table 4.

It is very important that declare all value of Table 4 carefully, as it would contributes to government’s computation of net tax liability and the GST dues. Any inaccurate values would lead to indiscrepancies, which can lead to fines and notices. 

Also bear in mind that a taxpayer is eligible to claim ITC only when it shows in the GSTR-2B. From January 1st, 2022, provisional ITC can not be claimed. 

Note: Ever since July 2022, the Table-4 of GSTR-3B has undergone certain changes.

Reversal of Input Tax Credit

If ITC is being used for personal purposes and not for business, ITC will be reversed. Here’s more on what can cause reversal of ITC:

1. Due to non-payment of invoice within 180 days
2. In case of ISD, if a credit note was issued by the seller, then the ITC that is reduced will be reversed.
3. For business that use supplies partly for business and partly for personal use, ITC used for personal use has to be reversed. Capital goods also come in the same category.
4. When the annual return is furnished, and the ITC on inputs is more than ITC that is actually reversed during the specified year then the difference amount will be added to output liability.

ITC Reconciliation Decoded

ITC reconciliation is crucial for businesses to ensure they claim accurate input tax credits (ITC), minimizing the chances of legal complications like penalties or GST registration cancellation. To reconcile:

1. Download the GSTR-2B data from the government portal.
2. Compare it with the details in the draft GSTR-3B.
3. Identify any discrepancies and make necessary corrections.

How to Automate and Maximise ITC Claims?

As a taxpayer every individual/ firm would want to maximise their ITC claims. Businesses often work with the same vendors each month, dealing in a consistent range of products. Automating the recording of supplier invoices for details like GSTIN, product quantity, and product codes is highly recommended. This ensures accuracy and minimizes the need for amendments.

Recent Updates and Changes in ITC Rules

October 2024: Notification No. 21/2024 dated 8th October 2024. Under Section 128A of the CGST Act, the interest and penalties for certain non-fraudulent ITC claims from prior years (2017-2020), were waived off. The waiver applies under strict conditions but excludes erroneous refunds. The aim is to streamline the ITC claim process while also promoting amenable reporting.