Input tax credit (ITC) in GST refers to the GST paid on goods and services purchased by a registered person. This credit can be used to offset the GST payable on sales. Let's break it down with an example:
Example:
- Mr. A buys goods from Mr. B for Rs. 800 plus GST.
- Mr. B issues an invoice with CGST and SGST.
- Mr. A sells the goods to Mr. C for Rs. 1000 plus GST.
- Can Mr. A can use the input tax credit from his purchase to offset the GST he owes on his sale?
Mr. A buys goods for Rs. 800 + GST from Mr. B. The total invoice is Rs. 944.
Taxable Value: Rs.800
Add: CGST @ 9%: Rs. 72
Add: SGST @ 9%: Rs. 72
Total Invoice value: Rs.944
Then, Mr A sells the same goods to Mr C for Rs.1000/- plus GST. He issues invoice to Mr C as follows:
Taxable Value: Rs.1,000
Add: CGST @ 9%: Rs. 90
Add: SGST @ 9%: Rs. 90
Total Invoice value: Rs.1,180
In this case, Mr A has to pay Rs.180/- (90+90) as his output tax i.e. tax on sales. But he has already paid GST of Rs. 144 (72+72) to Mr B on his purchases. Therefore, he can use this input tax credit of Rs.144 for payment of output tax of Rs. 180. In this case, he will have to make net payment of Rs. 180 less Rs. 144 i.e. Rs.36 in cash to the GST department.
Set-off of Input Tax Credit:
There are three types of GST, and specific rules govern how input tax credit can be used for payment of output tax. The chart below explains this:
Following chart explains rules relating to set off of ITC:
As per the rules, IGST should be first used for the payment of IGST and then for CGST and SGST. IGST should be exhausted in full for the payment of output tax. Then only, CGST and SGST can be used. CGST and SGST should be used firstly to set off output tax under the same head and then IGST. CGST and SGST can not be used for payment of each other.
How to claim the Input tax credit?
Input tax credit should be claimed while filing of form GSTR 3B. In GSTR 3B, information related to ITC should be entered in table no. 4. It is auto-filled from GSTR 2B to the extent of All other ITC. But it can be changed manually.
Following is the screen of GSTR 3B- Table No. 4:
Can Input tax Credit be utilized for payment of arrears in tax?
No. [Sec. 41(2)].
Who is eligible to take Input tax credit (ITC) under SGST & CGST Act?
A registered taxable person under GST Act who is paying tax due in the course or furtherance of business can claim and avail ITC credited in electronic ledger [Sec. 16(1)].
What are the documents required for claiming Input Tax Credit by a registered person?
A registered person (including an Input Service Distributor) can claim Input tax credit on the strength of the following conditions:
a) He must possess a Tax invoice issued by the supplier of goods or services or both or Debit note issued by a supplier
b) He must have received supply of goods or services or both
c) He must have paid the tax for it in cash or as input tax as under section 41 of GST Act
d) He must have filed proper returns under section 39 of GST Act.
A person who is eligible to get registration when not getting registered within the period of 30 days then can claim input tax credit on the stock in his hand?
No. [Sec. 25(1)].
Various Concepts about Input Tax credit:
Eligibility of ITC:
Section 16 of the CGST Act, 2017 specifies the conditions which should be fulfilled for claiming the ITC. If all such conditions are fulfilled, it is eligible credit. Following is the summary of such conditions:
Purchase should be for business purpose and not personal use.
Buyer must have a tax invoice issued by the supplier.
Such ITC should be reflected in GSTR 2B.
The buyer must have received the goods and/or services.
The payment of the supplier should be made within 180 days from the invoice date.
The ITC should not be blocked credit as per section 17(5).
Blocked credit u/s 17(5):
Blocked Credit under GST means the ITC on purchases which are defined as Ineligible as per Section 17(5). A registered person cannot claim such ITC while paying output tax if such purchases are listed in this section. To read more about blocked credit. Read our blog on Blocked credit- Section 17(5) of CGST Act
Reversal of credit:
ITC can only be claimed when such input supply results in taxable output supply. If purchases are made for personal purpose or for supplying exempted goods, such credit should be reversed.
Following are some other cases in which ITC should be reversed in table no. 4 of GSTR 3B:
Non-payment of invoices in 180 days
Credit note issued to ISD by seller
Inputs partly for business purpose and partly for exempted supplies or for personal use
Capital goods partly for business and partly for exempted supplies or for personal
ITC reversed is less than required
Reconciliation of ITC:
ITC claimed by the person has to match with the details specified by his supplier in his GSTR 1. If the supplier has correctly disclosed the details of his sale in GSTR 1 correctly, they are reflected in the GSTR 2B/2A of the buyer. Hence, ITC as per books and GSTR 2B/2A should be reconciled properly.
Types of ITC:
There are 3 types of ITC.
Credit of Input goods: This credit is GST paid on purchase of goods.
Credit of Capital goods: This credit is GST paid on such goods which are capitalized in the books of accounts. For example, fixed assets.
Credit of Input services: This credit is GST paid on services availed.
Conclusion:
Understanding and calculating input tax credit correctly is crucial in GST. Follow the eligibility rules and documentation for a seamless GST experience.
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