How to Save GST Tax?
GST tax cannot be saved directly but there are ways where one can reduce the liability of paying tax. The concept of Input tax credit being a core concept enables us to reduce the tax liability and also avoids the cascading effect of tax. In this article we will cover how we can save tax on GST and also understand which expenses can be claimed under GST in order to avail the ITC (Input Tax Credit) benefit.
For E.g. If a person pays Rs. 100 on purchase of his goods on which 18% GST was charged. If the goods were purchased from a registered dealer with a GST invoice the same 18% GST paid can be set of against the liability thereby enabling one to reduce the cost and thereby indirectly save tax. Also a person can save tax by reducing cost on purchases of assets or on expenses which are allowable as Input tax credit set off. Which expenses and purchases are allowed to claim as ITC is briefly discussed in this article. If your business is registered then you can claim following benefits
What is Input tax credit?
In simple words, input tax credit will help you to reduce the tax you are paying on sales, from the tax you have already paid on the purchase. For example, if you are a registered your business in GST,
The tax you pay for the sales of good is Rs 1,000
The tax you have already paid when you incure below expenses is Rs 600
So, You can claim input credit of Rs 600 and pay only Rs 400 in taxes.
What type of businesses expenses can be claimed as ITC?
1) Air Conditioner – Suppose Mr X has purchased Air conditioner for his office use he is to purchase the same from a registered GST dealer and ask for an invoice with GST tax so as to avail the ITC benefit. It is to be noted that the invoice should be in the name of business entity. So, if a registered person purchases an air conditioner for business purpose and invoice is in the name of the business entity, then he will be able to claim credit for tax paid on purchase of air conditioner. GST on AC is at 28%, so you can save that much amount
2) Mobiles – Companies who are service providers or associated with tele calling or telecom business and require mobiles, even otherwise if business is using Mobile phones and providing to employees for business then the GST on Mobile can be claimed as ITC. Business has to purchase it from registered GST dealer and also acquire the GST invoice in entity name in order to claim ITC.
3) Printing and Stationery – Every office uses printing and stationeries for office use this to can be claimed as ITC is purchased with a GST invoice from a registered dealer.
4) Television – Mr. R purchased television to place it in his offices in the waiting room for his customer/ clients who await back in the waiting room. The television is used for business purpose and not for personal use and is therefore allowed to be claimed as ITC on purchase from a registered GST dealer on receiving an appropriate GST invoice for the same.
5) Refrigerator – Refrigerator purchased at work place for use in business and for the furtherance of business is eligible to claim ITC if purchased from a registered dealer with GST invoice. E.g. Mr. S is having a business of cold storage and has purchased a refrigerator for the same he can claim ITC for the same. Even other wise if business plans to use for its employees it can be claimed as ITC
6) Drinking Water – Drinking water not being an beverage is eligible for ITC claim. Further in accordance to CGST Amendment Act 2018 section 17(5)(b) states that an employer is entitled to claim ITC on goods/ services which it is statutorily obligated to provide to its employees. Thus since drinking water falls under the ambit of statutory obligation on the part of the employer to provide to the employees the same is eligible for ITC claim.
7) Travelling Expense – GST need to be paid when a business spends money on travelling expense for official work done by its employees. GST credit on travelling expenses for office use can be claimed. But it is important that a proper GST invoice for the same is available. In most companies, it is one of the highest spending sectors. Corporates can control these expenses and claim input tax credit through GST compliant invoices. Example on Booking Air Tickets
8) Office Rent – ITC can be claimed on office rent paid if you are a registered dealer and the person to whom rent is paid is also registered under GST. Further a proper GST invoice for the same is to be acquired.
9) Office Furniture – Yes GST can be claimed on purchase of office furniture provided the selling dealer should have opted for regular scheme and should not be a composite dealer. The use of furniture is for office use only and not for personal use and the value of furniture debited to fixed asset block should be without GST. A proper GST invoice for the same is to be issued by the dealer selling the furniture.
10) Hotel Accommodation – Input tax credit on stay or accommodation in a hotel for business purpose is allowed. The invoice for the same is to be with GST and the booking should be with registered GST dealers.
The list can go long. The thumb rule is all the expenditure you incure for the business, ITC can be claimed. Also there are few ITC which cannot be claimed it is called Blocked Credit in GST
Other ways to consider to reduce cost and save GST tax
Increase purchase of Inter-state (outside the respective state) purchase of goods/ products instead of Intra-State goods (within the state)- In accordance to the ITC rule set off of IGST, ITC can be taken against IGST and even against CGST and SGST liability. Whereas, in case of Intra State purchase set off of SGST ITC can be taken only against SGST and IGST liability and that of CGST ITC can be taken only against CGST and IGST liability. Thereby, it makes the set of provision restrictive in case of Intra- state. So purchase of goods from Inter- state will be more beneficial. To understand this refer to the example below.
For E.g. Mr. A of Maharashtra purchases goods from Mr. Y of Gujarat who is a registered dealer he would be paying IGST on the goods so purchased. He sales goods within Maharashtra and charges CGST and SGST on the same. Since Mr. A has made an Inter State purchase and he can claim the input tax credit and set off IGST against both CGST and SGST.
But instead if he would make an Intra state (within the respective state itself) purchase that is within Maharashtra and sold the goods both intra state and inter- state. Than the GST that can be claimed as ITC on such purchase was set off is only CGST and SGST and according to the rule CGST set off can be taken only against IGST and CGST and not SGST liability. That of SGST can be taken only against IGST and SGST only and not CGST liability. But if the purchase was done Inter state the IGST set of would be applicable on all 3 i.e. the IGST liability, the CGST liability and the SGST liability.
|Input Tax Credit on Account of||Output Liability IGST||Output Liability CGST||Output Liability SGST|
|Integrated Tax (IGST)||1st Set off||2nd Set off||3rd Set off|
|Central Tax (CGST)||4th Set off||5th Set off||Cannot Set off|
|State / Union (SGST)||6th Set off||Cannot Set off||7th Set off|
*IGST should mandatory exhausted First in any proportion between 2 or 3. In case of carrying forward credits it is advisable to strike a balance & retain equal credits in both CGST and SGSTfor optimising credits in future as well. The easiest way is after using the IGST credits for the IGST liability, the balance available in IGST credits to be equally utilised for CGST/SGST credits
Further one should maintained all the bills, invoices and data of purchases which are incidental to your business so that you can claim the ITC. Many a times the invoices are either misplaced or not insisted to be raised thereby forgoing the chance to claim and avail ITC benefit. It is to be noted that the invoices should be GST invoices and should be from registered dealers.
Also it is recommended to account all your expenses as well which are incidental to your business.
For E.g. If Mr. A owns an entertainment company and makes expenses for dresses of models, and incurs cost of makeup products etc which are incidental to his business the same expenses with proper bills are to be considered and one can avail the ITC benefit for the same. Some clients miss to consider their expenses and forgo the benefit to claim eligible ITC.
Why GST registered dealer should purchase from GST registered dealer only and not a composite dealer?
Although a GST registered dealer can purchase from an unregistered dealer or a composite dealer but in both the case the Input tax credit of such purchases is not allowed to the registered dealer as a composition dealer cannot charge/ collect GST on its sales. This will restrict the registered dealer to acquire tax Input tax credit benefit and it will increase the cost. Therefore if a registered dealer purchases from another registered dealer he can avail ITC benefit and thereby reduce his cost.
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