Understanding and Claiming Input Tax Credit Under GST

The Goods and Services Tax (GST) regime in India brought about a crucial transformation with the introduction of the input tax credit (ITC) mechanism. This article aims to clarify ITC for both newcomers and seasoned businesses. It will cover the fundamental concepts of ITC, its application under GST, and the process for businesses to claim it, including recent regulatory updates.

Recent amendments have significantly impacted Input Tax Credit (ITC) claims under GST:

February 2022 Budget Updates

ITC Restriction: Input tax credit is now restricted if it is not available in GSTR-2B, as per Section 38.
Revised Claim Deadline: The time limit for claiming ITC on invoices or debit notes for a financial year has been updated. Claims must be made by the earlier of two dates: November 30th of the subsequent year or the date of filing the annual return.
Section 38 Revamp: This section has been completely revised to cover the communication of inward supply details and ITC, aligning with GSTR-2B. It outlines the specific manner, timing, conditions, and limitations for ITC claims, replacing the previous two-way communication system for GSTR-2. Taxpayers will also receive information regarding their eligible and ineligible ITC.
Section 41 Overhaul: This section no longer references provisional ITC claims and instead establishes conditions for self-assessed ITC claims.
Elimination of Provisional ITC Sections: Sections 42, 43, and 43A, which dealt with the provisional ITC claim process, matching, and reversal, have been removed.

December 2021 Changes

Removal of Additional ITC: CGST Rule 36(4) was amended to eliminate the 5% additional ITC that could be claimed beyond what appeared in GSTR-2B.
Mandatory GSTR-2B Reflection: Effective January 1, 2022, businesses can only avail ITC if the supplier has reported it in GSTR-1/IFF and it is visible in the recipient's GSTR-2B.

Defining Input Tax Credit (ITC)

Input Tax Credit (ITC) allows businesses to offset the tax already paid on their inputs against the tax payable on their outputs. This mechanism prevents the cascading effect of taxes, ensuring that tax is levied only on the value addition at each stage of the supply chain.

For example, consider a manufacturer:

If the tax due on the final product (output) is INR 450.
And the tax already paid on raw materials or components (inputs) is INR 300.
The manufacturer can claim an ITC of INR 300, meaning they only need to pay the remaining INR 150 as tax.

ITC Eligibility Under GST

The Input Tax Credit mechanism is applicable to entities registered under the GST Act. This includes manufacturers, suppliers, agents, e-commerce operators, aggregators, and other specified individuals. If a business is registered under GST, it is entitled to claim ITC for the taxes paid on its business-related purchases.

Process for Claiming Input Tax Credit Under GST

To successfully claim ITC under GST, certain conditions must be fulfilled:

Valid Documentation: You must possess a tax invoice for the purchase or a debit note issued by a registered dealer.
Receipt of Goods/Services: The goods or services for which ITC is claimed must have been physically received.
Note: If goods are received in multiple lots or installments, the credit becomes available only upon the receipt of the final lot or installment.
Note: If a recipient fails to pay for the service or the tax within three months of the invoice date, and has already claimed ITC, the credit will be added back to their output tax liability along with applicable interest.
Tax Payment to Government: The tax charged on your purchases must have been duly deposited with the government by your supplier, either in cash or through their own ITC claims.
Supplier's Return Filing: Your supplier must have filed their GST returns correctly.
Invoice Reflection in GSTR-2B: The supplier must have uploaded the invoice details in their GSTR-1, ensuring it appears in the recipient's GSTR-2B.

A cornerstone of GST reform is that ITC is only permissible when your supplier has actually remitted the tax collected from you. This necessitates that every ITC claim is matched and validated. Consequently, for you to claim ITC on purchases, all your suppliers must adhere to GST compliance.

Essential Conditions for ITC Claims

Further important points regarding ITC include:

Unclaimed ITC: If the tax paid on inputs exceeds the tax collected on sales, leading to unclaimed ITC, businesses can carry forward this credit or claim a refund.
If Input Tax > Output Tax: Carry forward ITC or claim a refund.
If Output Tax > Input Tax: Pay the balance tax.
The government does not pay interest on carried-forward ITC balances.
Invoice Age Limit: Generally, ITC cannot be claimed on purchase invoices older than one year, except under specific circumstances outlined in Section 18(1). The one-year period starts from the tax invoice date.
Scope of ITC: Since GST applies to both goods and services, ITC can be availed on both (excluding items on the exempted or negative lists).
Capital Goods: ITC is permissible on capital goods.
Personal Use Exclusion: ITC is not allowed for goods and services acquired for personal consumption.
Final Deadline for ITC: ITC claims are disallowed after the GST return for September following the end of the relevant financial year, or the filing of the annual return, whichever occurs earlier.

Understanding GST Tax Categories

The implementation of GST consolidated various prior indirect taxes, including VAT, CST, Excise Duty, Service Tax, and Entertainment Tax, into a single taxation system. Under GST, there are three primary types of taxes:

State Goods and Services Tax (SGST): Levied by state governments on intra-state supplies.
Central Goods and Services Tax (CGST): Levied by the central government on intra-state supplies.
Integrated Goods and Services Tax (IGST): Levied by the central government on inter-state supplies and imports.

How the ITC Mechanism Functions

To illustrate how ITC operates, consider a scenario involving a seller (Supplier A) and a buyer (Recipient B). Recipient B is entitled to claim ITC on purchases, provided the invoices are valid. The process unfolds as follows:

Supplier Uploads Invoices: Supplier A uploads the details of all tax invoices issued in their GSTR-1 return.
Data Auto-population: The sales data pertaining to Recipient B automatically populates and reflects in Recipient B's GSTR-2A or GSTR-2B. This information is then retrieved when Recipient B files their GSTR-2 (which details inward supplies).
Recipient's Acceptance and Credit: Recipient B verifies and accepts that the purchase has been accurately reported by Supplier A. Subsequently, the tax paid on these purchases is credited to Recipient B's 'Electronic Credit Ledger'. This credit can then be utilized to offset future output tax liabilities or, in certain situations, claimed as a refund.