What is input tax credit?

The input tax credit is the central tax (CGST), state tax (SGST), integrated tax (IGST), or cess that is paid by a person and has a GST registration on the supply of goods or services. GST input tax includes the tax that is paid on a reverse charge basis and the IGST charged on the import of goods. But, input tax does not include the tax paid on the composite taxation scheme.

The input tax credit is the tax paid by a business on the purchase and this tax is used to reduce the tax liability when a sale is made. The taxation levy is based on the value that is added at each stage of the supply chain until it reaches the consumer.

The Goods and the Service Tax Act is levied on the goods and the services based on the principle of value addition. To negate the cascading effect of the tax liability that is paid on the procurement of the raw materials, consumables, plants, and machinery, etc. This element of offsetting the tax liability is called the input tax credit.

Every person with a GST registration in the supply chain takes part in control, collects the GST tax, and remitting the amount that is collected. To avoid double taxation and the cascading effect of the tax input credit is provided to set off tax paid on the procurement of the raw materials, consumables, goods, or services that are used in the manufacturing, supply, and sale of goods or services.

The business can achieve neutrality using the input tax credit mechanism in the incidence of tax and ensure that the input tax element is not entering into the cost of production or the cost of supply of goods and services.

Who can claim input tax credit?

The input tax credit can be claimed by a person who is registered under GST only if he is meeting the conditions that are mentioned below:

• The input tax credit can be claimed only by a person that has a GST registration and has filed the GSTR 2 returns.
• The dealer should possess the tax invoice or the debit note that is issued by the supplier of input or the input services.
• The said goods or services or both should be received.
• The supplier has made the GST payment that is charged to the government concerning such supply.
• When the goods are received in installments the input tax credit can be claimed only when the last lot is received.
• No Input tax credit is allowed if depreciation has been claimed on the tax component of a capital good.

Documents required for claiming the GST input tax credit

As a registered taxable person the input tax credit can be claimed on basis of the following documents:

step:1 An invoice that is issued by the supplier of goods or services

step:2 An invoice that is issued by the recipient of the goods and services supplied by an unregistered dealer. Such supply comes under the reverse charge mechanism. This mechanism involves the supplies made by an unregistered person to a registered person.

step:3 A debit note that is issued by the supplier of the tax charged is less than the tax payable concerning such supply.

step:4 A bill of entry or similar documents is also required to document an integrated tax on imports.

step:5 An invoice or the credit note that is issued by an input service distributor as per the rules under GST.

step:6 A supply bill by a dealer that is opting for a composition scheme or an exporter or a supplier of the exempted goods.

Basic requisites for claiming the input tax credit

The following requisites are mandatory for claiming the input tax credit under the GST:

• The Individual must be registered under the GST law.
• A tax invoice or the debit note that is issued by the registered supplier showing the tax amount.
• The goods or the service should be received.
• The supplier should file the returns and pay the tax there on to the government.
• Where the goods are received in parts or installments, the input tax credit may be claimed on the receipt of the last lot or the installment.
• Where the input tax credit is included in the cost of the capital goods and the depreciation on the tax is claimed, no input tax credit is allowed.
• The input tax credit will not be allowed if the same is not been claimed within the prescribed time.

How to claim the Input tax credit?

All the regular taxpayers have to report the amount of the in the GSTR 3B.

A taxpayer can claim the input tax credit on the provisional basis in the GSTR 3B up to 20% of the eligible ITC that is reported by the supplier in the auto-generated GSTR 2A return. The taxpayer must cross-check the GSTR 2A figures before proceeding with the GSTR 3B.

Before the 9th of October 2019, a taxpayer was able to claim any amount of the provisional input tax credit. But CBIC has notified that from October 9, 2019, a taxpayer can claim only 20% of the eligible ITC available in the GSTR 2A as the provisional input tax credit.

This means that the amount of input tax credit that is reported in the GSTR 3B will be the total of the actual ITC in the GSTR 2A and the provisional ITC which is 20% of the actual eligible ITC in the GSTR 2A. It is important to match the purchase register with the GSTR 2A becomes very important.

Reversal of Input Tax Credit

The input tax credit can be reversed certain circumstances which are mentioned below:

• Failure to pay the supplier within 180 days from the invoice date.
• The goods and services whether inputs or capital goods are used for personal purposes.
• Goods and services utilized for producing or supplying the exempted goods or services.
• Sale of capital goods or plant and machinery on which the input tax credit was claimed.
• The credit notes are issued by the input service distributor.
• The supplies are ineligible under section 17(5) of the Act.
• A change from the registered regular dealer to composite dealer, where the input tax credit is reversed.
• The amount that is reversed may be added to the output tax liability in the month in which it is reversed,
• Interest is to be paid from the date the credit is availed till the date when the amount is reversed and paid.
• There is no time limit applicable for reclaiming the reversed credit.

Availing credit under Reverse Charge Mechanism

When the tax has been paid under the Reverse Charge Mechanism the input tax credit may be availed in the same month in which the payment is made provided the following conditions are satisfied.

• The liability has been discharged through cash.
• The goods or services have been used for business purposes.
• Self-invoicing is done on the purchases as no tax invoice can be issued by the unregistered supplier.

Reconciliation of Input tax credit

Input tax credit claimed by the person has to match the details that are specified by the supplier in the GST return. In case there is a mismatch the supplier and the recipient will be informed about the discrepancies once the GSTR 3B is filed.