Understanding Input Tax Credit under GST and Its Claim Process

A significant aspect introduced by the Goods and Services Tax (GST) framework is the system for input tax credit. This article will explain the concept of input tax credit (ITC) from a fundamental level, making it accessible to newcomers. For businesses familiar with previous tax structures like VAT, the article will also highlight the distinctions and implications of GST input tax credit.

Key Updates Regarding Input Tax Credit

February 1, 2022 Updates:

• Input Tax Credit (ITC) cannot be claimed if it is restricted as per GSTR-2B, which is available under Section 38.
• The deadline for claiming ITC on invoices or debit notes for a financial year has been revised. The new deadline is the earlier of two dates: November 30th of the subsequent year, or the date of filing the annual returns.
• Section 38, pertaining to the communication of inward supply details and ITC, has been completely revamped. It now aligns with Form GSTR-2B, outlining the conditions, timing, manner, and restrictions for ITC claims. This revision eliminates the two-way communication process from the suspended GSTR-2 and provides taxpayers with information on both eligible and ineligible ITC.
• Section 41 has also been updated to remove references to provisional ITC claims, now prescribing self-assessed ITC claims with specific conditions.
• Sections 42, 43, and 43A, which previously dealt with provisional ITC claims, matching, and reversal processes, have been removed.

December 29, 2021 Update:

• CGST Rule 36(4) has been amended, removing the provision for an additional 5% ITC beyond what is reflected in GSTR-2B. As of January 1, 2022, businesses can only avail ITC if their supplier has reported it in GSTR-1/IFF and it appears in the recipient's GSTR-2B.

December 21, 2021 Update:

• Effective January 1, 2022, ITC claims are strictly allowed only if they are displayed in GSTR-2B. This means taxpayers can no longer claim the 5% provisional ITC under CGST Rule 36(4), and all claimed ITC values must be accurately reflected in GSTR-2B.

What is Input Tax Credit?

Input tax credit (ITC) allows a business to reduce the tax already paid on its inputs when paying tax on its outputs.

Consider this example for a manufacturer:

• Tax due on the final product (output) is Rs 450
• Tax already paid on raw materials (inputs) is Rs 300
• The manufacturer can claim an input tax credit of Rs 300, meaning they only need to remit the remaining Rs 150.

Input Tax Credit within the GST Framework

The input tax credit mechanism is applicable to entities registered under the GST Act. This implies that if you are a manufacturer, supplier, agent, e-commerce operator, aggregator, or any other person registered under GST, you are eligible to claim ITC for the taxes paid on your purchases.

How to Avail Input Tax Credit under GST

To successfully claim input tax credit under GST, specific conditions must be met:

• You must possess a tax invoice (for purchase) or a debit note issued by a registered dealer.
• You should have physically received the goods or services.
  • Note: If goods are delivered in multiple lots or installments, the credit becomes available against the tax invoice only after the final lot or installment has been received.
  • Note: If the recipient fails to pay the value of the service or the tax within three months of the invoice date, and has already claimed ITC based on that invoice, the claimed credit will be added back to their output tax liability, along with applicable interest.
• The tax collected on your purchases must have been deposited/paid to the government by your supplier, either in cash or through their own ITC claims.
• Your supplier must have filed their GST returns.
• Your supplier must have uploaded the invoice details in their GSTR-1, and these details must consequently appear in your (the recipient's or buyer's) GSTR-2B.

One of the most transformative aspects of GST is that input tax credit is granted only if your supplier has remitted the tax they collected from you. This necessitates that every ITC claim is matched and validated. Consequently, for you to claim input tax credit on your purchases, all your suppliers must also be compliant with GST regulations.

Additional Information on Input Tax Credit:

• It is possible to have an unclaimed input tax credit if the tax paid on purchases exceeds the tax collected on sales. In such scenarios, you can either carry forward the excess ITC or claim a refund.
  • If tax on inputs > tax on output → Carry forward input tax or claim a refund.
  • If tax on output > tax on inputs → Pay the remaining balance.
  • The government does not pay interest on input tax balances.
• Input tax credit generally cannot be availed on purchase invoices older than one year, except in special circumstances under Section 18(1). This period is calculated from the date of the tax invoice.
• Since GST applies to both goods and services, ITC can be claimed on both, with the exception of items on the exempted or negative list.
• ITC is permissible on capital goods.
• ITC is not allowed for goods and services intended for personal use.
• No input tax credit is permitted after the GST return for September following the end of the financial year to which the invoice pertains, or after the filing of the relevant annual return, whichever occurs earlier.

Types of Taxes under GST

GST has replaced numerous existing taxes, including VAT, CST, Excise Duty, Service Tax, and Entertainment Tax.

Under the GST regime, there are three primary types of taxes:

1. State GST (SGST): Levied by state governments on intra-state supplies.
2. Central GST (CGST): Levied by the central government on intra-state supplies.
3. Integrated GST (IGST): Levied by the central government on inter-state supplies and imports.

How the Input Tax Credit Mechanism Operates

Let’s illustrate how Input Tax Credit works with an example. Suppose Mr. A is a seller who sells goods to Mr. B (the buyer). Mr. B will be eligible to claim ITC on these purchases based on the invoices.

Here are the steps involved:

1. Step 1: Mr. A uploads the details of all tax invoices issued in his GSTR-1 return.
2. Step 2: The sales details pertaining to Mr. B automatically populate in Mr. B's GSTR-2A or GSTR-2B. This data is then pulled when Mr. B files his GSTR-2 (details of inward supply).
3. Step 3: Mr. B confirms that the purchase details reported by the seller are correct. Subsequently, the tax paid on purchases is credited to Mr. B's 'Electronic Credit Ledger'. He can then utilize this credit to offset future output tax liabilities or claim a refund.