Input Tax Credit – ITC, is a tax credit that can be claimed against the taxes paid on the inputs or inward supplies.
To understand what exactly ITC means to consider the following:
A business charges and recovers GST on the products that it sells or services it provides. Now when they buy some inputs to manufacture an output or avail input services to provide an output service, they too pay some taxes on these. Hence that amounts to input taxes paid for inward supplies. Hence when they charge GST on the output, they can claim these input taxes as credit from the total output tax liability. This is what Input Tax Credit means in a nutshell.
There are various rules governing the process to claim ITC. When the turnover of a business is large and runs in millions the tax components will also be high. Hence ITC claims can reduce the impact of taxation and can basically improve cash flows and working capital deficits in the short run. Therefore, it is very important to make sure that you claim the accurate ITC and save on this money since the money saved is money earned.
Claiming accurate ITC
There are certain GST input tax credit rules that apply when you claim ITC.
Here are the things you must remember to claim accurate ITC:
- You must possess the invoice copy either physical or soft copy in order to claim ITC on the purchase
- You must have paid the vendor within 180 days of the invoice date else the ITC may become ineligible and get added to the output tax liability
- The buyer must have received the goods in his premises and in case of installments, the ITC may be claimed for the last installment paid.
- The supplier/vendor must have paid the taxes to the government either in cash or by claiming ITC
- The supplier/vendor must have also filed GST returns. This is a major change in the system where the ITC of a recipient of the goods/services is dependent on whether the supplier is GST compliant
- Other than that, the Services/Goods received are used only for Taxable purpose and not for Exempt/Personal purpose
- There is also some ineligible ITC under GST. Make sure that the items on which you claim ITC are not exempt items or the ones ineligible to claim ITC like capital goods for personal use, capital goods used to manufacture exempted products, purchases where tax is paid on reverse charge basis, blocked credits under section 17(5) and if you are a composition dealer
- If you have purchased a capital asset, make sure that you do not claim ITC on capitalized ITC portion since this will be claimed as depreciation and that would amount to double deduction and ITC will get rejected.
- Make sure you have all the documents in a place like an invoice from the supplier, Bill of entry issued by the customs department, Bill of supply, debit notes if any, invoice like a Bill of Supply for small purchases below Rs 200 or where RCM is applicable
Time limit for claiming ITC
Make sure you claim ITC within the time limits so that it doesn’t get rejected. You must claim the ITC for a given period before filing the GST returns for September following the financial year or filing Annual returns for the year, whichever is earlier.
Unclaimed Input Tax credit
You may have unclaimed credit in a certain month and you may require to carry it forward. There can be following situations with your tax credits during a month
Output tax more than input tax paid hence you have an outstanding tax payable.
Input tax paid is more than the output tax recovered and hence you have an excess tax credit that can be carried forward and claimed in later months.
Note that the government does not pay interest on the input tax credit balance.
Offset of ITC
There are three types of taxes under GST CGST, SGST and IGST. The offset of these can happen as follows:
For IGST – take ITC from IGST, CGST and SGST paid on purchases
For CGST – take ITC from IGST and CGST paid on purchases
For SGST – take ITC from IGST and SGST paid on purchases
Hence although IGST can be used to claim ITC from SGST and CGST, these two taxes of SGST and CGST cannot be offset against each other.
Overall these are some basic GST input tax credit rules to watch out for to ensure that your ITC claims are accurate and do not get rejected. There are many other details and in-depth rules that need attention when you claim your ITC and must be adhered to make sure that you save on taxes. As of now you can even claim provisional ITC too based on the returns you have filed mentioning the sales and purchases.
The new regime of Simplified returns where invoices will be uploaded on a continuous basis which would be visible to the recipients on a real-time basis. The invoices accepted by the recipient will be locked and considered for ITC. All those invoices rejected will not be eligible for ITC and pending ones can be carried forward to next return period. The locking system of invoices will be a bit lenient in the first six months. However, the supplier needs to report invoices regularly in the returns so that the recipient does not lose his ITC.