Input Tax Credit

Input Tax Credit under GST: GST is one of the biggest Tax Reforms in India since its independence. One of the Key benefits from GST is removal a of the cascading tax effect.

Input Tax Credit is an integral part of the GST implementation and would say that Input Tax Credit (ITC) is the backbone of the GST.

According to Section 16 (1) of CGST Act, 2017 : Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger ofsuch person.

In other words ,Input Tax Credit under GST is a credit which is available to the supplier to set off the tax he has paid on the purchase of goods from output taxon the sale of such goods. Hence, the tax will levy on the value added which results in avoiding double taxation.

Input Tax Credit under GST:

Input Tax in relation to a taxable person, means the tax charged on any supply of goods and/or services to him which are used in the course or furtherance of his business, but does not include the tax paid under the Composition.

Input tax includes the tax payable under the reverse charge .It includes taxes paid on input goods, input services and capital goods. Further, Credit of tax paid on capital goods is permitted to be availed in one instalment. If I-T depreciation claimed on tax portion then ITC not applicable.

Following conditions are to be satisfied by the registered taxable person for obtaining ITC:

  • he is in possession of tax invoice or debit note or such other tax paying documents as may be prescribed;
  • he has received the goods or services or both;
  • the supplier has actually paid the tax charged in respect of the supply to the government; and
  • he has furnished the return under section 39
  • cannot take ITC in respect of any invoice or debit note for the supply of goods or services after the due date for furnishing the return under section 39 for the month of September following the end of the financial year
  • the upper time limit for taking ITC is 20th October of the next FY or the date of filing of annual return whichever is earlier
  • input tax credit shall not be allowed on the said tax component in respect of which depreciation has been claimed

According to Section 17(5)of CGST Act, 2017, there is a restriction on availment of input tax credit on following services supply and service :

  • a) on motor vehicle and other conveyances;
  • b) food and beverages,
  • c) outdoor catering,
  • d) beauty treatment,
  • e) health services,
  • f) cosmetic and plastic surgery except where such service or goods are used in the supply of the same category of goods or services, or composite or mixed supply;
  • g) member ship of club, health or fitness center,
  • h) rent-a-cab,
  • i) life insurance and health insurance except where obligatory under any law (to be notified by Govt) or such inward supply is used for the provision of outward supply in the same category;
  • j) travel benefits extended to employees on vacation or LTC.,
  • k) inputs use of which results in the formation of an immovable property (except plant and machinery),
  • l) telecommunication towers,
  • m) pipelines laid outside the factory premises, etc.;
  • n) goods or service received for construction of immovable property other than plant and machinery i.e. foundation work etc. in respect of plant and machinery;
  • o) goods or services on which tax is paid on composition scheme;
  • p) goods or service received by the non-resident taxable person except on goods imported by him
  • q) goods lost, stolen, destroyed or written off.
  • r) goods given as gifts or free samples are also not allowed
  • s) goods or services by a person for construction of immovable property, other than plant and machinery, is not allowed.
  • t) motor vehicles can be availed only if the taxable person is in the business of transport of passengers or goods or is providing the services of imparting training on motor vehicles

How is Input Tax Credit Used?

Amount of credit available to the taxable person shall be credited to his 'electronic credit ledger' and is permitted to be utilized in the following order:

ITC has been received on account of CGST

  1. It should first be used to pay CGST.
  2. Then, any remaining amount should be used to pay IGST.
  3. Note that you cannot use ITC of CGST to pay SGST.

ITC has been received on account of SGST

  1. It should be used to pay SGST first.
  2. Then, any remaining amount should be used to pay IGST.
  3. Note that you cannot use ITC of SGST to pay CGST.

ITC has been received on account of IGST

  • It should be used to pay IGST first.
  • Then, any remaining amount should be used to pay CGST.
  • The last priority should be given to payment of SGST.

Conclusion : Success of any indirect taxation system is depends on minimum the cascading effect of taxes. Input Credit Tax is a vital area from GST perspective, which requires in- depth preparation.