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Published on:

July 10, 2024

Viraaj Vashishth

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Basics of GST

Input Tax Credit Under GST: Eligibility and Claim Process

With these reforms, the Goods and Services Tax (GST) regime brought about a mechanism called the Input Tax Credit (ITC), which allows businesses to claim credits for taxes paid on purchases against tax liabilities that are outgoing. This innovative strategy helps reduce taxes throughout the entire economy. It is critical to understand the exact eligibility criteria and conditions prescribed for claiming Input Tax Credit (ITC) under the GST regime of India.

What is an Input Tax Credit Under GST?

The businesses can claim an ITC credit for GST paid on purchases relating to their activities. The GST liability on outward deliveries is thereby reduced as this credit is used to reduce the cascading impact.

Important Points of Basic Form Input Tax Credit in GST

For instance,

1. A firm procures raw materials at Rupees 100 which includes 18% GST.

2. In turn, it pays a tax worth 18 Rupees to the provider of these goods.

3. The company produces finished products with a selling price being Rs.150 while consumers are taxed at 18%. It gets Rs.27 from those who purchase its goods.

Input Tax Credit under GST reduces the total tax outflow by subtracting the previously paid amount of Rs.18 as tax. Hence, there would be no double taxation all along the supply chain and instead of paying Rs27/-, only the net tax liability to be met will stand at Rs9/-. The concept of ITC facilitates the transfer of financial charges resulting from taxes by entrepreneurs.

Conditions for Claiming Input Tax Credit Under GST

The Indian goods and services tax does not allow input tax credit (ITC) on all its businesses as it limits the eligibility of its dealers. However, there are some qualification criteria one must meet to be able to engage in this method to reduce tax liability. These are the essential requirements necessary for this:

1. To obtain an input tax credit under GST, they need to register themselves as a taxable person. Businesses involving GST must have GSTIN and be registered under the framework so that any taxes paid on their business expenses can only be set off against future tax liabilities.

2. A tax invoice which acts as a documentary proof of payment of taxes made to the authorities is needed to substantiate an ITC claim. This invoice should show how much GST was paid towards suppliers of these products/ services purchased.

3. For taxation purposes, this credit has to be used by businesses when making acquisitions that will be subject to tax across all areas of operation to mitigate multiple taxation effects. Such goods cannot qualify as zero-rated supplies or for personal use.

4. Lastly, sellers who charge GST for their items or services should have already been registered with the government while small merchants within the composition scheme enjoy some relief in that respect.

Benefits of Claiming ITC:

1. Reduced cost through lower taxes paid hence remaining more competitive.

2. Cash flow is improved for companies when they can take credits already paid concerning their respective taxes. Read more about how supplier financing can ease your business journey.

3. Expensive machinery or complex devices may now be bought at lower prices leading to more investments made into them.

Time Limit for Availing ITC

The time limit is subject to specific terms and deadlines on which Input Tax Credit under GST can be availed of. The due date for claiming ITC, about the invoice, is by the date of filing the GSTR-3B return for September of the financial year after which the invoice pertains; e.g.

If an invoice is dated within FY 2022-23 then the ITC should be claimed by the due date of GSTR-3B return for September 2023.

How Do I Claim Input Tax Credit under GST?

To claim an Input Tax Credit under GST, some conditions for claiming ITC needs to be taken care of for compliance and proper credit utilization. Below is a quick guide:

1. GST Registration:

First of all, ensure that your business is registered under GST and you have a valid registration number called GSTIN i.e. Goods and Services Tax Identification Number.

2. Maintain Proper Documentation:

One must keep an accurate record of all purchase invoices and tax invoices including the details of the supplier with GSTIN, the amount of GST paid thereon along with a description of goods or services.

3. Eligibility Check:

Make sure that the goods/services involved in input tax credit under GST claims are not exempted or used for personal use but were used for business purposes only.

4. Tax Invoice Matching:

It must be checked if the supplier has filed a GST return & paid the applicable GST. GSTR-2A form provides information about inward supplies made by them.

5. File GST Returns:

Such returns can be filed every month or quarter as desired, where one can claim an input tax credit under GST. Thus claimed ITC should match with purchase register and GSTR-2A.

6. ITC Declaration:

During the filing of GSTR-3B, report that you are entitled to input tax credit in the relevant section. An ITC amount equivalent will be posted on the electronic credit ledger.

7. Use ITC:

The credited ITC can pay off your GST liability on outward supplies and credit used for payment of IGST, CGST and SGST in a specified order.

GST Input Credit Claim Rules

Businesses must understand how to claim Input Tax Credits under GST rules to be compliant with the law and get maximum benefits from taxes paid. The following are some key rules:

1. Possession of Tax Invoice or Debit Note:

To claim ITC, a registered person must have a valid tax invoice or debit note issued by the supplier.

2. Receipt of Goods or Services:

Only after receiving goods or services, one can claim for input tax credit under GST benefit; while in case of partial receipt, it is permissible for him to take only the proportional amount.

3. Tax Payment by Supplier:

The supplier should have paid the collected tax money directly to the government either in cash form or through utilizing its credits.

4. Filing of Returns:

To be able to claim an input tax credit under GST, the recipient has filed all necessary GSTR-3B returns (GSTR-3B).

5. Use for Business Purposes:

If goods/services are not used personally but rather for business purposes then only such goods/services would qualify under ITC otherwise they would not be eligible input tax credit which is meant for purely personal use.

Conclusion:

Every company operating under the GST system in India must grasp the nuances of input tax credit under GST. It can reduce a company’s net tax liability greatly when intelligently claimed, thus promoting fairness and transparency in the process. It is critical to understand the complex qualifying conditions and compliance requirements prescribed for ITC. Any misstep can lead to serious penalties.

But with knowledge about ITC and an expert in such matters to counsel you, things get easier. The CBIC website may provide answers on how to untangle the intricate web of Input Tax Credit under GST as well as other GST regulations. The Central Board of Indirect Taxes and Customs (CBIC) is the government's main indirect tax administering body that explains duties in simple terms. Nonetheless, seeking professional advice could still go a long way in optimizing gains from ITC while preventing many risks and surprises it carries along its path.

FAQs

1. What is ITC in GST with example?

The term “ITC” means “input tax credit”. GST is a mechanism that allows businesses to claim credit for the goods and services tax paid on purchase inputs. For example, if a company buys raw materials worth Rs. 100 plus 18% GST (Rs.18), and then sells the finished product for Rs. 150 plus 18% GST (Rs.27), it can claim the Rs.18 paid as ITC. Therefore, instead of paying the full Rs.27, the company only needs to pay the net tax of Rs.9 (Rs.27 - Rs.18). This helps prevent double taxation and reduces the overall tax burden.

2. Who can get ITC?

ITC can only be claimed by registered business entities under GST.

2. Can personal use purchases be claimed as ITC?

No, only those purchases which are meant for your registered business activities can be claimed against ITC.

3. How do you avail of ITC?

You avail ITC by showing it in your monthly G.S.T. return in Form GSTR-3B.

4. Which documents will help me claim ITC?

A valid tax invoice or debit note is necessary when doing this.

5.What if I haven’t got the invoice yet?

However, there is no valid tax invoice; you should never claim ITC.

6. What will happen if my supplier does not pay GST to the government?

You can’t be able to claim on any purchase as the seller will not have remitted the collected sales tax.

7. Are there any restrictions on claiming ITC?

Maybe, some goods and services ITC may be restricted or disqualified.

8. What happens with unutilized ITC?

Unutilised input tax credit under certain conditions can be carried forward to the next tax period subject to certain conditions.

9. How do I ensure that my claim of input credit is right?

Keep accurate records of your purchases, invoices and taxes paid and reconcile those details with the supplier’s GSTR 2B to be accurate in your references.