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A Detailed Account of Input Tax Credit In GST

Input Tax Credit Mechanism

Tax is one such word that baffles one and all. And for a common man who is a taxpayer, heavily burdened by the umpteen number of taxes listed in his paying bills, it is nothing less than frightening numbers glaring maliciously at him.

Letting go of your hard-earned money hurts! But if it helps to bring about a positive economic impact, one can bring themselves to do so. And finally, when the current tax regime was not leading India towards major financial growth, it was time to move on to something better and reformative.

That’s when the Goods and Service Tax stepped in as one of the biggest tax reforms in India. But before GST is implemented, it’s important to know about Input Tax Credit (ITC), one of the key features of GST.

Here’s a step by step guide for you to understand better:

  • Input tax

Input tax is the tax paid by the businessman on acquired goods and services. In short, it is tax paid on purchases. Besides, input tax is only available when the goods are purchased from registered dealer.

  • Output tax

Output tax is the tax charged by the businessman to its customers. In other words, it is a tax charged on sales. Besides, output tax is available on all sales.

  • Input tax credit

The raw materials are bought as inputs to create and sell the product and thereby, tax is paid. So, when the finished goods when sold as output, the tax paid on output would only be the amount deducting the tax paid as input tax. Therefore,

Input Tax Credit= Output Tax- Input Tax

Similarly, when it comes to GST Payable, it would be

GST Payable= Output GST- Input GST

However, Input Tax Credit can be claimed based on certain conditions namely,

  • The person must be registered as a taxable person under GST
  • The taxpayer must have a valid tax invoice or debit note or any prescribed supporting document
  • The goods or services on which GST is being claimed should be for business purposes only.
  • When the registered taxpayer receives the goods in instalments or lots, he can claim ITC after he has received the last lot.
  • GST Return should have been filed by the taxpayer under section 27 like GST-1, 2, 2A, 6, 6A, 7, 7A.
  • ITC can be claimed on taxable and zero rated supplies (export).
  • ITC can be credited to “Electronic Credit Ledger” on the common portal prescribed in the GST model law.

However, u/s 16(9), no ITC shall be claimed in the following cases:

  • When the goods and services are used for personal purposes
  • If tax is paid under GST composition scheme.
  • If goods and services are acquired to construct immovable property except plant and machinery.
  • Those goods and services that have been used by an organisation’s employees for their personal consumption.
  • If depreciation has been claimed on the tax component of cost of capital goods.

Time limit to avail GST ITC

Per Section 16 (3A) of the model GST law, input tax credit shall not be taken after one year from the date of invoice/ debit note relating to such supply, even if the taxpayer is otherwise eligible for ITC.

According to Section 16 (15) of the model GST law, ITC should be claimed before the month of September following the financial year to which the invoice pertains, or before filing the relevant annual return, whichever is earlier.

Utilization of ITC under the Model GST Law (MGL)

Section 35(4) of the MGL (section 7(4) of IGST Act) provides that ‘ITC can be used only for payment of tax, and not for any other liability like interest, penalty, fee.’

Section 35 (5) of the MGL (section 7 (5) of IGST Act) provides the manner in which the ITC can be utilized. Here’s how they can be used.

  • The amount of ITC of IGST available shall be first utilized towards payment of IGST and the amount remaining, if any, may be used for payment of CGST and SGST, in that order.
  • The amount of ITC of CGST available shall first be utilized towards payment of CGST and the amount remaining, if any, may be used for payment of IGST.
  • The amount of ITC of SGST available shall first be utilized towards payment of SGST and the amount remaining, if any, may be used for payment of IGST. It has also been provided that cross-utilization of CGST and SGST credit is not allowed.

The ITC which is unutilized can be claimed as refund in two situations:

  • export of goods or services and
  • in case of inverted tax structure [section 38 (2)].

In case of exports as well, no refund of unutilized ITC shall be allowed when goods are subjected to export duty. However, unutilized ITC can be carried forward, in all other cases.

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