Goods and Services Tax (GST) is considered the most modern and largest tax reforms in India. Under GST input tax credit is the most discussed topic.
Input Tax Credit
The system of getting back tax paid on the purchases while doing sales.
To be clear, we need to collect and pay GST on sales but the act provides for a deduction for the tax we have paid on the inputs used for the manufacture of the products.
As this is a new and developing provision, it is very important to understand what is it? The time limit to avail credit? It’s calculation, procedure to claim and where the credit is not allowed etc.
Input Tax Credit (ITC) – meaning and basics
input tax credit means the legal provision for deducting tax paid on inputs from the tax to be paid on output of the goods. This is available on goods or services.
when we just hear the term input tax credit we feel it is a new concept. It is not true it was available in some other form in the earlier regime also. The name was different. It was called as service Tax, VAT,CENVAT etc. under the new GST regime, ITC have got more prominence and wide scope.
It was not possible to claim input tax credit in the earlier regime f on most of the input taxes. Also central excise duty was limited to non manufacturers and non service providers.
There are conditions in place to claim input tax credit. understanding the provisions are very important for the assessee to claim it properly.
ITC may be person specific or input specific or area specific this is an important provision for the assessee as well the authority. So the rules are stringent and will changed as required by the government .
Time limit to avail GST ITC.
The act and rules have specific provisions for availing input tax credit and the time frame purchased by the authorities.
There are provisions for different situations wherein the inputs can be claimed for semi-finished goods or stock or finished goods.
The situations are
If a person is registered or liable to register or is granted registration
Input tax credit can be claimed only if it does not exceed one year from the tax invoice date of issue related to supply.
In other cases, ITC must be claimed earlier of the following-
a) Furnishing of annual return or
b) Due date of filing the monthly return (GSTR-3) for the next financial year’s September month.
How to calculate Input Tax Credit?
Let’s consider an example on how to calculate Input Tax Credit:
The service or product you sell attracts a tax of 12%. You use input services or goods during your business. The tax due from you (of 12%) can be adjusted to the taxes paid already by you on the purchase of such inputs. The manufacturers add taxes only for the value addition done and not on the total product value.
Let’s consider an example of a manufacturer who manufactured a taxable product where the input raw materials which was taxed for 1000 and the final products sold where the tax collected was 1200, then the net tax to be paid to the authority will be 200.
This tax credit is available at all succeeding stages, retailers and distributors charge GST and can claim the Input Tax Credit.
Procedure to claim Input Tax Credit (ITC)
The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:
[ 1] One must be a registered taxable person.
[ 2] One can claim Input Tax Credit only if the goods and services received is used for business purposes.
[ 3] Input Tax Credit can be claimed on exports/zero-rated supplies and are taxable.
[ 4] For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
[ 5] One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
[ 6] Supporting documents for claiming ITC – debit note, original tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
The Input Tax should be paid through Electronic Credit/Cash ledger.
How to utilize the Input tax credit?
In GST we have three types of taxes CGST, IGST, and SGST/UTGST.
For the inter-state supply of goods/ services, IGST is charged.
and for the intra-state supply of goods/services CGST and SGST/UTGST are charged.
While making payment for the above taxes, input tax credit will be allowed in the following manner-
From July 2019 onwards the below mode of off-set functionality has been made available, the following is the order and priority for ITC utilisation
1. IGST first full IGST then CGST and then SGST
2.CGST first CGST and then IGST
3. SGST first SGST then IGST
What is the manner of availing ITC On Capital goods?
Unlike earlier Laws,100% of the credit is allowed in the 1st year of purchases.
If the depreciation is charged on the GST portion(i.e. credit) of capital goods, ITC will not be allowed.
Cost GST Total cost Deprecation charged on ITC available
500 50 550 550 nil
500 25 525 500 25
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.
Cases Where Input Tax Credit under GST Cannot Be Availed
Specific cases are mentioned under GST where no input tax credit shall be available to the applicant. We are going to discuss the ineligibility of input tax credit with examples.
Cases when ITC is not available under GST
1. Motor vehicles & conveyances
ITC is not available for Motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons (including the driver).
Further, ITC is not available on vessels and aircraft.
For example, ABC & Co. buys a car for their business. They cannot claim ITC on the same.
Exceptions to ITC on motor vehicles/vessels/aircrafts
ITC will be available when the vehicle is used for making taxable supplies by the following.
a) Supply of other vehicles or conveyances, vessels or aircrafts.
If you are in the business of supplying cars then ITC will be available.
For example, a car dealer purchases a car for Rs.50 lakh plus 14 lakh GST (ignoring cess calculations). The same car was later sold for 70 lakhs along with Rs.19.60 lakh GST. Since he is a dealer, he can claim ITC of 14 lakhs and pay only Rs.5.60 lakh (19.60 – 14).
b) Transportation of passengers
If you are providing transportation of passengers then ITC will be allowed on the vehicle purchased.
For example, Happy Tours purchased a bus for inter-city transport of passengers. ITC is available.
c) Imparting training on driving, flying, navigating such vehicle or conveyances or vessels or aircrafts, respectively.
A driving school purchases a car to give training to students. The school can claim ITC on the GST paid on the car.
d) Transportation of goods
ITC will be allowed on motor vehicles (and other conveyances) used to transport goods from one place to another. However, this is concerning other transporters and not goods transport agencies (GTA)
2 Supply of food and beverages, outdoor catering, beauty treatment, health service and cosmetic and plastic surgery
An inward supply of aforesaid goods or services or both is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as an element of
a taxable composite or mixed supply then the input tax credit will be available. Example- When the outdoor catering service is subcontracted then the main contractor can avail
input on tax charged by sub-contractor because the service received is used for making the outward supply of the same category.
3 Rent-a-cab, Life and health insurance
The Government notifies the services which are obligatory for an employer to provide to its employees
under any law for the time being in force or The receiver of service provides the same line or category of service example- Government made a law for the companies to provide cab facility for there female employees.
4 Travel benefit to employees as leave or home travel concession
Example – Tour arranged for the employee
5 Works contract service for construction of immovable property
Works contractor uses the service of another contractor, then the former can claim the ITC.
6 Construction of immovable property which includes reconstruction, renovation, additions or repairs. Goods/services used for construction on his own account or even when it is used for the furtherance of business.
Example- Mr.A constructing his own office, ITC on goods or services used for the construction of the office cannot be claimed by Mr.A
7 ITC will not be available for the goods/services received by the non-resident taxable person.
In case if Non-resident taxable person imports goods or service, then ITC will be allowed.
8 Goods/services received for personal consumption
9 Goods stolen /destroyed/ written off/distributed as a gift or free samples
10 Dealer under composition scheme- Neither the dealer nor the receiver of goods from the dealer can claim ITC
11 Membership in a club, Health, and Fitness centre
Example- Company paying the gym fees for its employees.
GST is a vast topic, will discuss other aspects in coming articles.