ITC under GST: Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”) is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is ‘tax on tax’. Under the present system of taxation, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments, and vice versa. One of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently. As the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage..
Input Tax Credit under GST – Conditions To Claim
- Possession of a tax invoice or debit note or document evidencing payment
- Receipt of goods and/or services
- goods delivered by supplier to other person on the direction of registered person against a document of transfer of title of goods
- Furnishing of a return
- Where goods are received in lots or installments ITC will be allowed to be availed when the last lot or installment is received.
- Failure to the supplier towards supply of goods and/or services within 180 days from the date of invoice, ITC already claimed will be added to output tax liability and interest to paid on such tax involved. On payment to supplier, ITC will be again allowed to be claimed
- No ITC will be allowed if depreciation have been claimed on tax
component of a capital good ⇒ If invoice or debit note is received after - the due date of filing return for September of next financial year "or"
- filing annual return
- whichever Is later
- No ITC will be allowed
- Common credit of ITC used commonly for
- Effecting exempt and taxable supplies
- Business and non-business activity
ITC under GST
Let us understand how ‘cascading’ of taxes takes place in the present regime. Central excise duty charged on inputs used for manufacturing of final product can be availed as credit for payment of central excise duty on the final product. For example, to manufacture a pen, the manufacturer requires, plastic granules, refill tube, metal clip, etc. All these ‘inputs’ are chargeable to central excise duty. Once a ‘pen’ is manufactured by using these inputs, the pen is also chargeable to central excise duty. Let us assume that the cost of all the above mentioned inputs is say, Rs.10/- on which central excise duty @10% is paid, means Re.1. The cost of the manufactured pen is say Rs.20/-, the central excise duty payable on the pen @10% will be Rs.2/- . Now the manufacturer of the pen can use the duty paid on inputs, i.e. Re.1/- for payment of duty on the pen. So he will use Re.1 paid on inputs and he will pay Re.1/- through cash (1+1=2), the price of the pen becomes Rs. 22/-. In effect, he actually pays duty on the ‘value added’ over and above the cost of the inputs. This mechanism eliminates cascading of taxes.
- a. Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-state or intra-union territory without legislature supply of goods or services or both.
- b. State Goods and Services Tax (SGST) [also known as State Tax] on intra-state supply of goods or services or both.
- c. Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-union territory supply of goods or services or both.
- d. Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on inter-state supply of goods or services or both. In case of import of goods also, the present levy of Countervailing Duty (CVD) and Special Additional Duty (SAD) would be replaced by integrated tax.
| Credit of | To be utilised first for payment of | May be utilised further for payment of |
| CGST | CGST | IGST |
| SGST/UTGST | SGST/UTGST | IGST |
| IGST | IGST | CGST, then SGST/UTGST |
- a. He is in possession of tax invoice or any other specified tax paying document.
- b. He has received the goods or services. “Bill to ship” scenarios also included.
- c. Tax is actually paid by the supplier.
- d. He has furnished the return.
- e. If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received.
- f. He should pay the supplier, the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 2(1) & (2) of ITC Rules]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed.
- a. Invoice issued by a supplier of goods or services or both
- b. Invoice issued by recipient alongwith proof of payment of tax
- c. A debit note issued by supplier
- d. Bill of entry or similar document prescribed under Customs Act
- e. Revised invoice
- f. Document issued by Input Service Distributor
- a. motor vehicles and other conveyances except under specified circumstances.
- b. goods and/or services provided in relation to:
- i. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;
- ii. Membership of a club, health and fitness center;
- iii. Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;
- iv. Travel benefits extended to employees on vacation such as leave or home travel concession;
- a. A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax.
- b. A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day, immediately preceding the date of registration.
- c. A person switching over to normal scheme from composition scheme under section 10 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer.
- d. Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.
- e. ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier.
- f. In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilised ITC shall be allowed to be transferred to the transferee.
- g. A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid.
- h. In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.