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Input Tax Credit

Jun 10, 2022

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Contents

ITC stands for Input Tax Credit. Where the term input means any goods (other than capital goods or goods which have a usage in the course or furtherance of business. Similarly, for service the above statement holds true.

Input Tax Credit Availability

ITC is available to-

  1. Registered Person
  2. One should possess taxpaying documents issued by a supplier
  3. One should receive goods or services
  4. The tax charged on the supply that has been actually paid to be government
  5. One should furnish the returns

On the basis of Section 17 of GST the usage of Input Tax Credit is determined as:

  1. ITC Available- Taxable Supplies, & Zero-rated supplies
  2. ITC not Available- Non-taxable Supplies, Exempt Supplies, Nil-rated Supplies

In the case of banking companies and financial institutions, the yearly option to avail at a standard rate of 50% ITC on inputs, capital goods, and input service on a monthly basis is available and also 50% shall not be applied to tax paid on supplies made by one registered person to another registered person having the same PAN. 

It is not available for motor vehicles if the vehicle has a sitting capacity of less than 13 or less including the driver except in the case when:

-The vehicle is used for transportation of goods, or

-The vehicle is used for further supply of vehicles or conveyance, used for transportation of passengers or is used for training for driving/ flying/ navigating 

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Time limit to avail Input Tax Credit

According to the ITC categorisation list, there are three types of entities and timing to avail ITC:

Entity Insights Credited
Registered Taxable Person- 16(1)
  • Admissible to take ITC on supplies used/intended to be used in the course/furtherance of business

 

The amount will be credited to the electronic credit ledger
Individual or entity who has applied for registration within 30 days of becoming liable to register, and registration granted ITC is available on Inputs, Semi-finished goods or Finished goods One will get the amount on the day immediately preceding the date from which he has become liable to pay tax
Individuals who have carried out voluntary registration Similar aspect with respect to above individuals or entity One will get the amount on the day immediately preceding the date of registration.

Reversal of Input Tax Credit

Under certain circumstances ITC can be reversed, they are-

  1. When supplies are intangible under section 17(5) of the GST Act
  2. When a credit note is issued by the input service distributor
  3. When the transition is from the registered regular dealer to the composition dealer
  4. When there is the sale of capital goods or plant- machinery on which input tax credit was claimed
  5. When there is a failure in paying the supplier within 180 days from the date of invoice
  6. When there is the transition from registered regular dealer to composite dealer

To avail of the credit, tax has to be paid under Reverse Charge Mechanism (RCM), which must satisfy the two conditions:

  • Liabilities should be released via cash
  • Self-invoice has been done on such purchase
  • Goods and services have been used only for the business purpose

And finally, the Input Tax credit is reversed at:

-There is no time limit for reclaiming the reversed credit

-The amount reversed may be added to the output tax liability in the month in which it is reversed

-And interest will be paid from the date of availing credit till the date when the amount is reversed & paid.

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Rules of ITC

While claiming for ITC few rules have to be kept in mind:

  1. Time Limit
  2. Important Document
  3. 180 Day

-This rule states that the buyer claiming the ITC should make complete payment within 180 days from the date of supply.

  1. 10% Provisional rule

-This rule states that if by any means the supplier fails to furnish their invoices in their GSTR-1 and it doesn’t reflect in one GSTR-2A. Then in that case one will be eligible for an additional 10% of what the actual ITC mentioned on GSTR-2A.

  1. Receiving Goods
  2. ITC on Capital Goods, Import of Goods & Debit Notes

Capital Goods: One cannot claim ITC on the capital goods if deprecation has already been claimed. (Note: One can avail of either of them)

Import of Goods: One should furnish a Bill of entry & IGST payment challan

Debit Notes: ITC is claimed on Debit Notes against the invoice

  1. Goods received in instalments

-If anyone is receiving goods on an instalment basis then the goods received at the final instalment will be considered and only after it ITC will be claimed.

  1. Tax deposition to Government

-One must ensure that GST that one has paid to the supplier reaches the government via GST return. This is because if it doesn’t reach the Government office, one will not be able to claim ITC.

  1. Common Credit

-This can be claimed under two circumstances: First Business & non-business related activity and Taxable & effecting exempted supplies.

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