Basic of Input Tax Credit, Eligibility, Documents Required, Time limit to Avail and Blocked Credit in GST from April 2020
Input Tax Credit (ITC) under Goods and Service Tax Act 2017
Input Tax Credit (ITC) is the amount of tax paid at the time of purchase of goods or availing of service or both. When you are in business and have GST Number, ITC is used to reduce the tax liability at the time of making sales, under GST option has been given to the business entity to claim credit to the extent of the GST paid on the purchases or services. The mechanism of Input tax credit is the main pillar of GST and is the main reason for the smooth credit flow in GST, leading to ultimately tax liability paid by the end consumer of goods or services
Under the previous regime the following was the flow of taxes:
- VAT was levied on intra state supplies
- Sales tax was levied on inter state supplies
- Service tax was levied on Services
- Excise was levied on production of goods.
And the final result the tax payer would not able be to get the credit of one tax against the input tax of another tax. Under the previous regime a lot of credit was not properly utilized or availed, there where multiple tax points, double taxation and may other issues.
For instance retailers who use to pay service tax on rent for their shops would not be able to claim Input tax credit of service tax with the VAT which they used to charge their customers on sale of goods.
Due to introduction of GST such issues has been resolved now as there is only one single tax across various states which would be levied and there would be a seamless flow of credit of ITC.
What is Input tax and Input tax credit?
Input tax in relation to a registered person means the central tax, state tax, integrated tax or union territory tax charged on any goods or service or both made to him and includes-
- Integrated goods and services tax charged on import of goods
- The tax payable under reverse charge mechanism and paid by e commerce operator
But does not include the tax paid under the composition levy.
Input tax credit means the credit of input tax as per section 2(63) of IGST.
Eligibility and Conditions for taking input tax credit:
The following are the eligibility and conditions for taking input tax credit under GST as per section 16:
- A person registered under the goods and service tax act is entitled to take credit of tax paid on inward supplies of goods or services used/ intended to be used in the course or furtherance of business.
- For taking input tax credit under the taxpayer have valid tax invoice/ debit note/ prescribed tax paying documents
- The taxpayer must has received the goods or service or both. In case of goods delivered to third person on the direction of the registered person deemed to be received by the registered person and ITC will be available to registered person.
- Tax is actually paid on such supply to the government either in cash or through utilization of input tax credit admissible in respect of the said supply
- The taxpayer has furnished the return under section 39 i.e. has filed GSTR3B and claimed the ITC in such return
- In case the goods are received in installment then ITC can be claimed at the time of receipt of last installment.
- If the taxpayer is claiming depreciation on tax component then the ITC is not admissible.
- If the payment is not made to the supplier within 180 days from the date of invoice, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon. The recipient shall be entitled to avail of the credit of input tax on subsequent payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon. Where part payment has been made by the taxpayer then proportionate credit will be allowed.
Documents required for claiming input tax credit:
As per rule 36 the input credit shall be availed by a registered person including the input service distributor on the basis of any of the following documents namely:
- An invoice issued by the supplier of goods or service or both in accordance with the provision of the act
- Invoice issued by the recipient along with the proof of payment of tax.
- A debit note issued by a supplier in accordance with the provisions of the act
- A bill of entry or any similar document prescribed under the customs act, 1962 or the rules made there under for the assessment of integrated tax on imports.
- An Input service distributor Invoice or Input service distributors credit note or any document issued by an input service distributor.
The document so issued must contain the relevant information which is to be furnished by registered person in the GST return. However, if the document does not contain all the specified particulars but contains the below details:
- The amount of tax charged
- Description of goods or services
- Total value of supply of goods or services or both
- GSTIN of the supplier and recipient and
- Place of supply in case of inter state supply
then input tax credit can be availed by such registered person
Time limit for availing the Input tax credit:
As per section 16(4) a registered person shall not be entitled to take input credit in respect of any invoice or debit note for supply of goods or service or both after:
- The due date of furnishing of the return under section 39 of the month of September in the following financial year to which such invoice or invoice relating to such debit note pertains, or
- The date of furnishing of the relevant annual return.
For instance, taxpayer can claim the input tax credit for the FY 2019-20 before:
- The date of filing of the GSTR3B return for the month of September 2020 i.e. 20th of October 2020 or
- Before the date filing the annual return for the FY 2019-20
Whichever is earlier
Blocked credits- Ineligible Input/ Capital goods/ Input Service:
As per section 17(5) ITC shall not be available in respect of the following namely:
- Motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver), however credit will be available when they are used for making the following taxable supplies namely:-
- Further supply of such motor vehicles; or
- Transportation of passengers; or
- Imparting training on driving such motor vehicles.
- Vessels and Aircraft. However, credit will be available when they are used:-
- For making the following taxable supplies, namely:-
- Further supply of such vessels or aircraft; or
- Transportation of passengers; or
- Imparting training on navigating such vessels; or
- Imparting training on flying such aircraft;
- For transportation of goods
- Service of general insurance, repairs and maintenance of Motor vehicles, vessels and aircraft referred above. However, the input tax credit in respect of such services shall be available-
- Where the motor vehicles, vessels or aircraft referred to in 1 and 2 above are used for the purposes specified therein;
- Where received by a taxable person engaged-
- In the manufacture of such motor vehicles, vessels or aircraft; or
- In the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;
- Foods and beverages, outdoor Catering, beauty treatment etc.
- Works contract services when supplied for construction of an immovable property. However, credit is allowed-
- Where it is an input service for further supply for works contract service.
- Where it is supplied for construction of plant and machinery.
- Goods and services received by a taxable person for construction of immovable property on his own account including when such goods or services or both are used in the course or furtherance of business. However, credit is allowed if they are is supplied for construction of plant and machinery
- Goods or services or both on which tax has been paid under composition scheme
- Goods or services or both received by a non resident taxable person except on goods imported by him
- Goods or services or both used for personal consumption
- Goods, lost, stolen, destroyed, written off or disposed off by way of gift or free samples.