KNOW ALL ABOUT- INPUT TAX CREDIT (ITC) UNDER GST

One of the fundamental features of GST is the seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country.

What is input tax credit?

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Here’s how:

When you buy a product / service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (Tax on sales) and balance liability of tax (tax on sales) and balance liability of tax (Tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: (a) Tax payable on output (FINAL PRODUCT) IS Rs. 450. (b) Tax paid on input (PURCHASES) is Rs. 300. (c) You can claim INPUT CREDIT of Rs. 300 and you only need to deposit Rs. 150 in taxes.

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils all the conditions as prescribed.

(a) The dealer should be in possession of tax invoice.

(b) The said goods / services have been received.

(c) Returns have been filed.

(d) The tax charged has been paid to the government by the supplier.

(e) When goods are received in installments ITC can be claimed only when the last lot is received.

(f) No ITC will be allowed if depreciation has been claimed on tax component of a capital good.

A person registered under composition scheme in GST cannot claim ITC.

What can be claimed as ITC?

ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for:

(a) Personal use (b) Exempt supplies (c) supplies for which ITC is specifically not available.

How to claim ITC?

Details	Integrated Tax	Central Tax	State/UT Tax	Cess
1	2	3	4	5
(A) ITC Available (whether in full or part
(1) Import of goods
(2) Import of services
(3) Inward supplies liable to reverse charge (other than 1 & 2 above)
(4) Inward supplies from ISD
(5) All other ITC
(B) ITC Reversed
(1) As per rules 42 &          43 of CGST Rules
(2) Others
(C ) Net ITC Available        (A – (B)
(D) Ineligible ITC        (1) As per section              17(5)
(2) Others

All regular taxpayers must report the amount of input tax credit (ITC) in their monthly GST returns of Form GSTR-3B. The table above requires the summary of eligible ITC, Ineligible ITC and ITC reversed during the tax period.  A taxpayer can claim ITC on a provisional basis in the GSTR-3B to an extent of 20% of the eligible ITC reported by suppliers in the auto-generated GSTR-2A figure before proceeding to file GSTR-3B.

Reversal of Input Tax Credit

ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from these, there are certain other situations where ITC will be reversed. 

ITC will be reversed in the following cases-

1) Non-payment of invoices in 180 days – ITC will be reversed for invoices which were not paid within 180 days of issue.

2) Credit note issued to ISD by seller- This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.

3) Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for business which uses inputs for both business and non-business (personal) purpose. The ITC used in the portion of input goods / service used for personal purpose must be reversed proportionately.

4) Capital goods partly for business and partly for exempted supplies or for personal use – this is similar to above except that it concerns capital goods.

5) ITC reversed is less than required- This is calculated after annual return is furnished. It the  total ITC on inputs of exempted / no-business purpose is more than the ITC on inputs of exempted / non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.

The details of reversal of ITC will be furnished in GSTR-3B. To find out more about the segregation of ITC into business and personal use and subsequent calculations, please visit our article.

Reconciliation of ITC

ITC claimed by the person has to match with the details specified by his supplier in his GST return. In case of any mismatch, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR-3B. Learn how to go about reconciliation through our article on GSTR-2A Reconciliation. Please read our article on the detailed explanation of the reasons for mismatch of ITC and procedure to be followed to apply for re-claim of ITC.                      Contd. ….

Documents Required for Claiming ITC

The following documents are required for claiming ITC: (1) Invoice issued by the supplier of goods / services (2) The debit note issued by the supplier to the recipient (if any). (3) Bill of entry. (4)  An invoice issued under certain circumstances like the bill of supply issued instead of tax invoice if the amount is less than Rs. 200 or in situations where the reverse charge is applicable as per GST law. (5) An invoice or credit note issued by the Input Service Distribution (ISD) as per the invoice rules under GST. (6) A bill of supply issued by the supplier of goods and service or both.

Businesses use many capital goods on which input tax credit is available.

What is Capital Goods?

Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services. For example, a blast furnace used in the iron and steel industry is a capital asset for the steel manufacturer.

Difference between Capital Goods & other inputs

Let us take an example. You are making a cake in your oven. You add ingredients such as eggs, water, flour, butter. These are your inputs. The cake is your final product. The oven is the capital good which helps you to make the cake. Inputs are consumed while making the final product and are treated as business expenses as cost of production.

Capital goods are not consumed when the final product is made. They are not consumed in a single year of production. Therefore, they cannot be entirely deducted as business expenses in the year of their purchase. Instead, they are depreciated over the course of their useful lives. The business recognizes part of the cost each year through accounting techniques as depreciation, amortization and depletion.

What is Credit on Capital Goods?

When you purchase anything, you are required to pay GST on it. Later, you are required to pay GST on it. Later, you can claim input tax credit on the GST paid on you purchases. Similarly, when you are purchasing any machinery for your factory, you will pay the applicable GST rate. This GST paid can be claimed as credit in the same way as inputs. However, if you claim depreciation on the GST Paid while purchasing the capital asset, you cannot claim input tax credit.

What is Common Credit?

Businesses often use the same assets and inputs for both business & personal use. For example, Ms. Anita is a freelance designer and   blogger. She has a personal laptop which she also uses for freelance work.  She can claim the .input credit of GST paid on purchase of laptop only to the extent it pertains to her freelance business. Ms. Anita has also purchased special designing software. Since this pertains only to her business, she can claim full ITC on this.

Why is common credit important?

ITC is only available for business purposes. Many trades use the same inputs for both business & personal reasons. A taxpayer cannot claim any tax benefit of personal expenses. Again, goods exempted under GST already enjoy 0% GST. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation. So, ITC on inputs for exempted goods will also be removed.                                                                            

The following calculations will help you to calculate the common credit that is attributable to personal supplies leaving behind only the portion that pertains to taxable sales. Only that amount can be claimed ITC. The credit that is attributable to personal supplies & exempted supplies must be reversed while filing GSTR-3B.

Capital Goods Used Only For:

Only for Personal Use Only for Exempted Sales	Only Normal Taxable Sales (incl. 0-rated sales)	Partly for Personal / Exempted And Partly for normal sales
NO ITC	ITC	Calculate proportionate ITC

Let us take each case one by one.

Capital Goods used only for Personal Use or for Exempted Sales

No ITC is available for personal purchases or for capital goods used in exempted sales. This will be indicated in GSTR-3B and shall not be credited to the electronic credit ledger.

Example 1: Personal Purchases

Ms. Anita has purchased a fridge. Since this is not required for her business, i.e. a purely personal purchase, she will not be able to claim any ITC on the GST Paid for the fridge.

Example 2: Capital goods used for exempted sales

Mr. Avinash has purchased a small flour mill in his grocery shop to grind wheat grains to flour. Since he is producing unbranded flour it is exempted sales, he cannot claim any ITC on the GST paid for the mill.

Capital goods used for normal sales

XYZ has purchased machinery to manufacture shoes. Since, shoes are normal taxable supplies, the GST included paid while purchasing machinery will be completely available as ITC. This shall be indicated in GSTR-3B and shall be credited to the electronic credit ledger.

Common credit for partly personal /exempted and partly normal sales

• The ITC paid for the capital goods will be credited to electronic credit ledger
• Useful life of such capital asset will be taken as 5 years from the date of purchase
• Now the total amount of input tax credited to electronic credit ledger for the whole useful life will be distributed over the useful life.

The useful life will be taken as 5 years. If you pay GST on a monthly basis then you use the following formula:

What happens if one starts using an asset for exempt goods also for taxable goods?

If a capital asset was earlier used exclusively used for:

• Personal purpose OR
• Selling exempted goods

And now it will used commonly for:

• Business and personal purpose OR
• Affecting taxable and exempt supplies

Input tax to be credited to electronic credit ledge=Input Tax – 5% of Input tax for every quarter or part thereof from of invoice.

Let us understand this via an example.

Mr. Avinash bought a capital asset for use in exempt supplies only. He paid Rs. 100,000/- along with GST of Rs. 18,000/- as input tax on 1^st October 2017. On 15^th November 2018, he wishes to use the capital asset commonly for both taxable and exempt supplies.

Now the eligible common input tax credit will be calculated as follows:

Input Tax – 5% of Input tax for every quarter or part thereof. The no. of quarters from 1^st October 2017 to 15^th November 2018= 5 = 18,000 – 4500 = 13,500. Now, this is the common credit available to Mr. Avinash.

He will credit Rs. 13,500 to Electronic Credit ledger. Now he will calculate the ITC attributable to exempt supplies as per the formula for exempt supplies.

Common credit for one month = 13,500/60= 225 assuming his total turnover is Rs.160 lakhs and exempted sales is 40 lakhs-

Credit attributable for exempt supplies = Value of exempt supplies x common credit for the month                                                                         Total turnover

Credit attributable for exempt supplies = (40/60)* 225= Rs.56.25.

This amount of Rs.56.25 will be reversed in GSTR-3B under the ITC Reversal column.

Reversal of credit under certain circumstances

In the following circumstances the proportionate ITC will be reversed i.e. added to output tax liability in GSTR-3B:                       

• Where a normal taxpayer opts to pay under composition scheme or goods / services supplied by him become exempt.
• In case of supply of capital goods or plant and machinery, on which input tax credit has been taken.
• Every registered person whose registration is cancelled. In-put tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as five years.

Example: Capital goods have been in use for 4 years, 6 months and 15 days. Therefore the useful remaining life in months = 5 months ignoring a part of the month Input tax credit taken on such capital goods = C (say 10 lakhs) input tax credit attributable to remaining useful life = C*5/60 = 10, 00,000*5/60 = 83,333

The above calculation must be done separately for integrated tax and central tax. This amount must be reversed in (i.e. because part of output tax liability) and furnished in:

• Where a normal taxpayers opts to pay tax under composition scheme or goods / services supplied by him become exempt-

Form GST ITC -03

• Registration is cancelled – Form GSTR – 10

This must be accompanied by a certificate from a practicing chartered accountant or cost accountant. In case of sale of capital goods, if the amount determined above is greater than the tax on transaction value of such sale, then the amount determined as above will be added to output tax liability. The details must be furnished in FORM GSTR-1.

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