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Input Tax Credit (ITC) under GST: A Step-by-Step Guide to Claiming ITC

Input Tax Credit (ITC) under GST A Step-by-Step Guide to Claiming ITC

Input Tax Credit (ITC) under GST: A Step-by-Step Guide to Claiming ITC

Input Tax Credit (ITC) under GST is like a refund for the taxes you pay when you buy things for your business. You can use this refund to lower your taxes when selling your products or services. It’s a way to ensure you only pay taxes once on the same money. It’s like getting back some of the money you spent on taxes. This helps businesses save money and keeps things fair. This article will look into Input Tax Credit (ITC) under GST.

What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) under GST prevents businesses from paying taxes twice. When a company buys ingredients or materials, it must pay taxes on them. But with ITC, the business can use these taxes to lower the taxes it has to pay when it sells its products. It’s like a discount for the taxes you already paid. This helps businesses save money and makes the tax system fairer. It’s a special rule that stops taxes from piling up and making things more expensive.

For example, imagine you’re baking cookies to sell. You need ingredients like flour, sugar, and chocolate chips. Now, these ingredients have taxes on them. But with ITC, you get a unique power – you can subtract the taxes you paid on these ingredients from the taxes you collect when you sell your cookies.

Essential Conditions for Availing Input Tax Credit (ITC) under GST

To claim an input tax credit under GST, a dealer must satisfy the following conditions:

  • Valid Documentation: The dealer should possess a valid Tax Invoice, Debit or Credit Note, or Supplementary Invoice provided by the supplier for the goods or services purchased.
  • Receipt of Goods/Services: The dealer must have received the goods or services for which the input tax credit is claimed.
  • Filed Returns: The dealer should have filed the required returns, specifically GSTR-3, a summary return of inward and outward supplies.
  • Tax Payment Confirmation: It’s essential to ensure that the supplier has paid the appropriate tax amount to the government. The input tax credit can only be claimed if the suppliers’ taxes have been properly paid to the authorities.
  • Invoice Matching: The dealer must have completed the process of matching invoices. This involves verifying the details of invoices uploaded by the supplier with the dealer’s own records. Any discrepancies should have been resolved, and the final input tax credit amount after necessary adjustments should have been determined.

When Can You Get GST Input Tax Credit?

You can get GST Input Tax Credit (ITC) in different situations:

  • When You Register: If you become a GST-registered business, you can claim ITC on inputs and goods in stock from the day before you become liable to pay tax. But remember, you need to apply for registration within 30 days and get approved.
  • Voluntary Registration: If you voluntarily register for GST, you can claim ITC on inputs and goods in stock from the day before your registration is approved.
  • From Composition Scheme to Regular: If your turnover goes beyond INR 50 Lakhs and you switch from the composition scheme to a regular dealer, you can claim ITC on inputs, goods in stock, and capital goods from the day before you switch. The credit on capital goods might reduce by a certain percentage.
  • Exempt to Taxable: When items that didn’t have GST become taxable, you can claim ITC on inputs and goods in stock that relate to those now taxable items. You can also claim credit on capital goods used exclusively for those taxable items (with a reduction).
  • Business Changes: If your business is sold, merged, demerged, amalgamated, leased, or transferred, you can transfer unused ITC to the new business if there’s a provision.
  • Mixed Use: If you use goods or services for business and other purposes, you can claim ITC only on the portion used for business.
  • Taxable and Exempt Supplies: If you use goods or services for taxable and exempt supplies, you can claim ITC only on the portion used for taxable and zero-rated supplies. No credit for exempt supplies or reverse charge paid supplies.
  • Partial Goods Receipt: When you receive goods in parts, you can claim ITC only after you receive the last part.
  • Pipelines and Towers: You can claim ITC in stages for pipelines and telecom towers. 1/3rd in the year of purchase, 2/3rd in the next year (including last year’s credit), and the rest in the year after.

Situations Where You Can’t Claim Input Tax Credit under GST

There are certain situations where you won’t be able to claim Input Tax Credit (ITC) under GST:

Late GST Registration

You must apply for GST registration within 30 days of becoming liable to avoid losing out on eligible ITC for inputs and goods in stock before you become liable to pay tax.

Exceeding Time Limits

ITC must be claimed within the earliest of these dates: one year from the invoice date, filing the return for September of the next financial year (by October 20th), or filing the annual return (by December 31st of the next financial year).

Delayed Payment

If you haven’t paid for supplies received and the tax within three months from the invoice date, the claimed ITC will be added to your liability and interest.

Motor Vehicles and Conveyance

ITC isn’t allowed for motor vehicles and conveyance unless they are further supplied, used for transporting passengers/goods, or for training purposes.

Other Scenarios

 You can’t claim ITC in various scenarios, including membership of clubs, health & fitness centers, rent-a-cab services, life & health insurance for employees (except mandatory services), certain services like food and beverages, outdoor catering, cosmetic surgery, and more. ITC is also disallowed on goods used for personal consumption, exempt supplies, reverse charge basis, and cases like lost or disposed goods.

Adjustments to Availed Input Tax Credit in Special Cases

In addition to the situations mentioned earlier, the GST Input Tax Credit rules outline provisions for specific exceptional scenarios:

Switching to the Composition Scheme

 If a regular dealer who has previously claimed ITC decides to switch to the composition scheme, they are required to repay the ITC previously availed on inputs in stock, inputs in a semi-finished state, finished goods in stock, and capital goods (adjusted by the specified percentage) on the day just before the transition to the composition scheme.

Exemption of Taxable Goods/Services

 Suppose taxable goods and/or services supplied by a person are later declared as exempt. In that case, that person must repay the ITC claimed on inputs in stock, inputs in semi-finished or finished goods in stock, and capital goods (adjusted by the specified percentage) on the day before the date of exemption.

Special Cases of Input Tax Credit (ITC) under GST

ITC for Capital Goods

You can get Input Tax Credit for capital goods in GST. However, there are exceptions:

  • ITC is not available for capital goods solely used for making exempted products.
  • Capital goods used only for non-business purposes also won’t qualify for ITC.
  • If depreciation has been claimed on the tax component of capital goods, ITC won’t be allowed.

ITC on Job Work 

  • Sometimes, a manufacturer may only complete part of the production process and sends goods to a job worker for more work. In such cases:
  • The main manufacturer can claim credit for tax paid on goods used in this process.
  • ITC is available when goods are sent directly from the main facility or the supplier’s place.

ITC by Input Service Distributor (ISD)

An Input Service Distributor (ISD) is a registered person’s main office, branch, or registered office. ISD distributes input tax credits to recipients under categories like CGST, SGST/UTGST, IGST, or less, based on their purchases.

Required Documents for Claiming Input Tax Credit (ITC)

To claim an Input Tax Credit (ITC), you’ll need the following documents:

  • Supplier’s Invoice: The invoice issued by the supplier for the goods or services you’ve purchased.
  • Bill of Supply (for Small Amounts): If the total amount on the invoice is less than Rs. 200, you can also use a document similar to a Bill of Supply.
  • Supplier’s Debit Note: A debit note issued by the supplier to correct errors or update details.
  • Bill of Entry or Equivalent: You can use the Bill of Entry or similar documents for imported goods.
  • Supplier’s Bill of Supply: If your supplier issues a Bill for specific goods or services.
  • ISD Document: If you’re part of an Input Service Distributor (ISD) scheme, you can use invoices or credit notes provided by the ISD.

Deadline for Claiming Input Tax Credit (ITC) under GST

When the Tax Invoice is issued within a Year:

  • If a person is registered under GST, has applied for registration, or will register, they can claim input tax credit from the day they become eligible for tax.
  • If a GST-registered individual switches to the composition levy scheme and later starts paying tax regularly, they become eligible to claim ITC when they begin paying tax typically.
  • Individuals who voluntarily register for GST can claim ITC from the day they register.

When the Tax Invoice is issued for More Than a Year:

The last date is before filing the September GST monthly/quarterly return form, following the end of the financial year for which the invoice was issued.

Alternatively, it should be claimed before filing the GST annual return.

Calculating Input Tax Credit under GST:

In a transaction involving two parties – the supplying business (SB) and the receiving business (RB) – the calculation works like this:

If RB buys goods worth ₹20,000 from SB at a GST rate of 12.5%, RB pays an input tax of ₹2,500.

When RB sells the same goods for ₹25,000 (including output tax of 12.5%), making the final price ₹28,125, RB can claim an input tax credit of ₹600 (₹3,125 – ₹2,500).

How to File GST Form ITC-01: For Claiming Input Tax Credit

The procedure to File GST Form ITC-01 in detail below:

  • Login to the GST Portal: Log in to the official GST Portal using your login credentials.
  • Enter Details: Enter your username and password to access your account.
  • Access ITC Forms: Select’ Returns’ from the ‘Services’ tab and click ‘ITC Forms’ to access the GST ITC Forms page.
  • Prepare Online: Click the ‘Prepare Online’ button under GST ITC-01 to provide a statement through the GST Portal.
  • Select Claim Type: Choose the appropriate claim type from the ‘Claim Made Under’ drop-down list. For instance, Section 18(1)(a) applies if you applied for registration within 30 days of becoming liable, which can be filed only once.
  • Enter Supplier’s GSTIN: Enter the GSTIN of the supplier who provided the goods or services.
  • Invoice Details: Fill in the invoice details, including invoice number and date (which should be before the grant of approval).
  • Select Goods Type: Choose the relevant ‘Goods Type’ from the drop-down list.
  • Description of Inputs: Enter a description of the inputs in stock or in semi-finished or finished goods.
  • Unit Quantity Code: Select the appropriate ‘Unit Quantity Code (UQC)’ from the drop-down list.
  • Enter Quantity: Specify the number of inputs.
  • Enter Invoice Value: Input the invoice value, considering adjustments by debit or credit note.
  • Claim ITC Amount: Enter the ITC claimed as Central Tax, State/UT Tax, Integrated Tax, and Cess. Ensure that CGST and SGST amounts are the same and their total doesn’t exceed the invoice value (or IGST, for Inter-State purchases).
  • Add Entry: Click the ‘Add’ button to add the entry.
  • Save: After entering all details, click ‘Save.’
  • Edit/Delete: The Edit/Delete icon can modify or delete an invoice entry.
  • Preview: Click ‘Preview’ for a PDF draft of GST Form ITC-01.
  • Submit: Click ‘Submit’ to submit the form.
  • Proceed: Click ‘Proceed .’Once data is submitted, the page freezes, and changes cannot be made.
  • Refresh Page: Refresh the page to see the status change to ‘Submitted.’

This process lets you claim Input Tax Credit using GST Form ITC-01 on the GST Portal.

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