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GST : Input tax Credit explained

Input Tax Credit, popularly known as ITC, is a highlight of GST India from its very inception. It is designed to bring Goods and Services Tax (GST) “a seamless flow of credit,” mitigating the cascading effect of sundry taxes and the non-availability of credit across different taxes that subsists under the country’s present taxation system.

Meaning:

“Input Tax Credit (ITC)” means the utilization of credit for “input taxes” paid on purchases made for business purposes.

“Input Tax” refers to the GST charged on goods/services used or intended to be utilized for the furtherance of the business of the taxable person. It omits any GST paid on reverse charge mechanism.

Availability of Input Tax Credit (ITC):

There are a few conditions to receiving Input Tax Credit, including but not limited to :

  • The taxpayer should have a valid tax invoice/debit note or other similar document as prescribed
  • The taxpayer has received the goods/services; if the goods are received in lots, then the point of receipt for the purpose of INPUT TAX CREDIT is the last lot where goods were received The supplier of goods/services has paid by cash or credit to the felicitous ascendancy the tax charged on the goods/services
  • The taxpayer has furnished a GST Return

Time limit to avail Input tax credit:

Credit of input tax on an invoice can be availed within one year from the date of invoice/debit note. It should be claimed afore filling the GST return for the month of September following the financial year to which that invoice pertains, or afore filling the annual return, whichever is earlier.

Utilization of Input Tax Credit under GST India:

As you already know, the levy of GST has 3 components namely : CGST, SGST and IGST.

  • CGST (Central GST) : Levy on supply of all goods and/or services within a state by the central regime
  • SGST (State GST): Levy on supply of all goods and/or services within a state by the respective state regime
  • IGST (Integrated GST): Levy on all interstate supplies of goods and/or services by central regime

While all of the three levy’s flow into the electronic credit ledger, there are certain limitations on how they can be used to set off outward tax liability. A snapshot of how these components can be used is as follows :

  • CGST against CGST & IGST
  • SGST against SGST & IGST
  • IGST against IGST, CGST & SGST

The Input Tax Credit becomes available for utilization by crediting the “Electronic Credit Ledger” of the taxpayer maintained on the Portal with the GST administration department.

Input tax credit can’t be utilized against tax outflow for the zero rated supplies, and it can’t be used if the business is for nontaxable supplies/exempt supplies/nil rated supplies.

If the input goods/services are utilized partially for business purposes and partially for non-business purposes, then the input credit is available proportionately.

Refund of Input Tax Credit:

The unutilized balance can be refunded to the business only in 2 cases:

  • If the taxpayer is in the business of exports
  • If the GST rate of output supplies is less than the rate applicable on input supplies. Which is called an inverted duty structure in tax parlance.

The Input Tax Credit balance uploaded from returns filed under earlier laws will be auto populated in this electronic credit ledger for the stock of inputs, semi-culminated goods, and finished goods on the date of transition, and then on the basis of GST return with the amount of tax claimed to be paid on input supplies.

The authorities will reconcile the details of inward supply furnished by receiver with the details of the outward supplies furnished by corresponding supplier. If there are mismatches, then the Input Tax Credit claimed will be inverted and notification will be sent to both receiver and supplier. The amount of tax will be integrated to the output liability of the receiver. If the supplier deposits the tax and rectifies his GST Return within the prescribed time frame, then the receiver can reclaim the input credit by reducing his output liability.

We hope this article was helpful. Please do reach out to us should you have any queries or comments.

by Nazia Girdher

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