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If you’re involved in supplying goods or services under the GST system, you’ve likely heard of Input Tax Credit. But what exactly is ITC in GST, and why is it crucial for businesses? ITC allows businesses to reduce their tax liability by claiming credit for taxes paid on inputs, such as raw materials or services used to produce their final product.
This mechanism not only lowers the overall tax burden but also ensures the tax system remains transparent and efficient.
In this blog, we’ll explore ITC in GST in detail, covering eligibility conditions, required documents, and how to calculate ITC. By the end, you’ll have a clearer understanding of how ITC works, enabling you to streamline your tax management effectively. Let’s begin with the basics.
Table of Contents
1) What is Input Tax Credit?
2) Conditions to Claim Input Tax Credit ITC in GST
3) Documents Required for Claiming Input Tax Credit
4) GST Rules To Claim Input Tax Credit
5) How to Calculate Input Tax Credit?
6) Taxes Under GST Types
7) Deadline for Claiming Input Tax Credit in GST
8) How Does the Input Tax Credit System Operate in GST?
9) Effective ITC Reconciliation Tips
10) Conclusion
What is Input Tax Credit?
Input Tax Credit is a primary aspect of the Goods and Services Tax. Its goal is to eliminate taxes' ripple effect and decrease the expenses associated with operating a company. Businesses can decrease their tax liability by claiming credit for the GST paid on purchases through Input Tax Credit under the Goods and Services Tax. ITC guarantees that only the extra value is subject to taxation, avoiding a cascade effect.
Nevertheless, not every claim is valid, and companies must meet specific requirements aligned with the Objectives of GST, such as maintaining valid tax invoices and settling payments to suppliers within 180 days, to successfully claim ITC.
Conditions to Claim Input Tax Credit ITC in GST
In order to qualify for your ITC claims, you must meet the following requirements:
ITC Calculation
Businesses must determine the credit by calculating the input tax paid on goods or services in order to claim ITC. The computation must adhere to the guidelines established by GST authorities, guaranteeing precise and lawful adherence.
Goods or Services Receive
Credit can be obtained once the person has received the goods and services they wanted. This applies to cases in which the delivery address and billing address are not the same.
Actual Payment of Tax
The supplier you are buying from needs to have given the tax money to the government. The receiver can only claim the corresponding ITC after paying the tax.
Filing of Returns
The necessary returns must have been filed by the person in order to receive the input tax credit. Submitting a summary of the return of both outward and inward supplies is crucial.
Eligibility Based on Lot
ITC can only be claimed after receiving the final lot of goods if they are received in installments. This guarantees that a tax credit is not requested too soon for partial shipments.
Prompt Payment to Supplier
The value of the goods or services, including tax, must be paid to the supplier within 180 days from the invoice date. If there is a default, the credit amount will be added to the recipient’s output tax liability, along with interest. Once the payment is made, the credit can be reclaimed.
Documents Required for Claiming Input Tax Credit
The following are the required documents for successful claiming of ITC:
Supplier's Invoice
Supplier’s Invoice is generated by the supplier when any purchase of goods or services is made from the supplier.
Bill of Supply
Bill of supply is the document that is issued for the goods or services that are exempted from the GST.
Supplier's Debit Note
Supplier debit note is issued by the supplier of goods or service for updating the details or correcting any errors if any.
ISD Document
Input Service Distributer (ISD) Document scheme is for the persons who are registered for the ISD. This will help in availing the ITC with the help of credit notes and invoices which are provided by the ISD.
Bill of Entry
Bill of entry or the similar document is used for the imported goods that are imported from outside the country.
GST Rules To Claim Input Tax Credit
The following are the rules for the businesses that needs to be followed for claiming the ITC:
a) Valid Document: The buyer should have a valid debit note, tax invoice, or some other prescribed document issued by the dealer.
b) Goods or Services: The buyer should have received the goods or service. If the product is received in installments, credit should be claimed upon receipt of the last installment.
c) Insurance and Repairs: General insurance, maintenance and repair with respect to aircraft, motor vehicles and vessels.
d) Supplier Tax Payment: The supplier should pay the due tax to the government for recipient to claim an input tax credit
e) ITC on Vehicles: Motor vehicles for transporting people having a seating capacity of more than 13, including the driver, aircraft and vessels, money for, or by a financial institution or banking company.
f) GST Filing Compliance: The supplier should have filed GST returns. GST rules allow you to claim input tax credit on purchases you make. This is only allowed if the supplier is compliant with GST norms and has paid the tax collected from the buyers.
g) 180 Day Rule: To claim ITC, the buyer should make the payment for the purchase, including tax, within 180 days of the invoice being issued. If the buyer fails to do so, the amount of credit claimed will be added to his output tax liability. After the taxpayer pays the amount due to the supplier, they can claim ITC.
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How to Calculate Input Tax Credit?
A company with a GST registration buys raw materials worth ₹20,000. The GST rate for raw materials stands at 18%. The company buys office supplies valued at ₹30,000, with a GST rate of 18% applied. By assuming these amounts in the following steps, we will explain you how to calculate the ITC:
Step: 1 ITC Calculation
Raw Material ITC: ₹20,000 * 18% = ₹3600
Office Supplies: ₹30,000 * 18% = ₹5400
Total ITC Amount: ₹3,600 + ₹5,400 = ₹9,000
Formula: Amount * 18% = Total ITC
Step: 2 Output Tax
If the business sells goods or services worth ₹50,000 and the GST rate is 18%, the output tax would be:
Output Tax: ₹60,000 * 18% = ₹10,800
Step: 3 Net GST Payable
For calculating the Net Payable GST, one just need to deduct the ITC amount from the output tax:
Net GST Payable = Output Tax – ITC
Net GST Payable: ₹10,800 (Output Tax) - ₹9,000 = ₹1,800
₹1,800 will be the net GST payable
Taxes Under GST Types
GST is made up of various taxes, such as Central Goods and Service Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Service Tax (IGST). ITC is available for all these taxes if the proper rules are obeyed and recorded.
a) Central Goods and Service Tax: This tax is collected by the central government on intra-state transactions. For instance, when goods or services are sold within the same state, both Central Goods and Services Tax and State Goods and Services Tax are applied. The revenue from CGST is directed to the central government.
b) State Goods and Services Tax: It is collected by the state government, and is applied to intrastate transactions, just like CGST. The total tax on an intrastate supply is split equally between CGST and SGST, with each government receiving its respective share.
c) Integrated Goods and Service Tax: It is levied on interstate transactions, meaning when goods or services are supplied between different states. It also applies to imports and exports. The central government collects IGST and subsequently distributes a portion to the states involved.
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Deadline for Claiming Input Tax Credit in GST
The deadline to claim input tax credit under GST is the earlier of these two dates:
a) The due date for filing the annual return for that financial year, or
b) The due date for filing the monthly return for September of the following financial year.
For instance, if a registered person wants to claim ITC for the financial year 2022-23, they must do so before filing the monthly return for September 2023 or the annual return for 2022-23, whichever comes first.
How Does the Input Tax Credit System Operate in GST?
The Input Tax Credit system under various Types of GST enables businesses to claim credit for taxes paid on purchases (inputs) used in the production or supply of goods and services. This mechanism helps reduce their tax liability and prevents the cascading effect of taxes, where taxes are applied at each stage of production.
1) Claiming ITC on Inputs: When a business purchases goods or services for production or resale, it pays GST on these inputs. The business can then claim this amount as ITC, allowing them to deduct the input tax paid from the tax collected on their sales (output).
2) Conditions for Claiming ITC: To claim ITC, several conditions must be met:
a) The business must be registered under GST.
b) The recipient must have received the goods or services.
c) The supplier must have paid the GST to the government.
d) The supplier must have filed their GST returns.
e) The recipient must have valid documentation, such as a tax invoice or debit note, proving the payment of GST.
3) Final Tax Payment: After deducting the input tax credit from the output tax liability, businesses pay the remaining GST to the government. If the ITC exceeds the output tax, the business can either carry forward the balance or, in some cases, initiate the GST Refund Process to claim a refund.
Effective ITC Reconciliation Tips
The Input Tax Credit claimed by a taxpayer must align with the details provided by the supplier in their GST return. If there are any discrepancies, both the supplier and recipient will be notified after filing GSTR-3B. Additionally, to fully understand ITC mismatches and the steps to reclaim ITC, please read this comprehensive blog.
1) Start Promptly
Start reconciling your claims as soon as possible to reduce the errors in the claims and the chances of missing the dates.
2) Maintain Accuracy
Validate that all invoices, receipts, and other paperwork are correct and match with your records. Incorrect information on your documents may cause lag or render your ITC claims invalid. Keeping a detailed record and complete documents makes the work easier and reduces the chances of errors in the claims.
3) Reconcile Frequently
Keeping an eye on the process frequently will help you to detect the discrepancies promptly.
4) Automate Processes
Taking the help of technology by using different accounting software's to automate ITC reconciliation, which will reduce human errors and will save time.
5) Consult Experts
If you are uncertain about claiming ITC, seek advice from a tax expert or accountant to help navigate the complexities of GST.
Conclusion
Grasping the complexities of ITC in GST is important for businesses targeting to reduce their tax liabilities. By maintaining to the point documentation, filing on time, and Fulfilling the required conditions, you can efficiently claim your Input Tax Credit. Embracing best practices and regularly reconciling your ITC will keep you compliant and allow you to fully benefit from the GST system’s advantages.
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Frequently Asked Questions
What is the Turnover Limit for GST?
Businesses with an annual turnover exceeding Rs. 40 lakhs for goods and Rs. 20 lakhs for services must register for GST and pay taxes on their taxable goods and services. However, businesses with a yearly turnover below Rs. 40 lakhs are not required to register for GST.
What is the Penalty Under GST?
High-value frauds under the GST Act occur when the unpaid tax amount exceeds Rs. 100 lakhs. In such cases, the monetary penalty is 10% of the unpaid tax amount (which will be higher than Rs. 10,000). Additionally, a jail sentence may be imposed for these high-value frauds.
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