What is Input Tax Credit Under GST?

The tax that is paid when purchasing goods and services that are utilised in the course of conducting business is referred to as input tax credit. Businesses can lower their tax obligations by claiming input tax credit under the GST regime for the GST they paid on these goods and services. This system guarantees a smooth credit flow and does away with the tax cascade effect that was common in the previous indirect tax system.

Input Tax Credit Meaning

Input Tax Credit (ITC) under GST means claiming the credit of the GST paid on the purchase of goods and services used for business purposes. The concept of ITC ensures that there is no double taxation and that the tax is levied only on the value addition at each stage of the supply chain.

Benefits of Input Tax Credit

The primary benefits of input tax credit under GST include:

• Cascade effect elimination: The Input-Tax Code (ITC) makes sure that taxes are only applied to value addition at every point in the supply chain, thereby preventing the cascade effect of taxes.
• Enhanced competitiveness: ITC reduces production costs and boosts a company's ability to compete by enabling it to claim credit for the GST paid on inputs.
• Decreased tax burden: By enabling businesses to deduct the GST paid on inputs from their tax liability, the Input Tax Credit (ITC) lowers the total tax burden on them.
• Encourages tax compliance: The ITC mechanism promotes tax compliance by incentivizing businesses to purchase goods and services from registered suppliers who pay GST.
• Uninterrupted flow of credit: ITC ensures a smooth and uninterrupted flow of credit throughout the supply chain, promoting efficiency and reducing the cost of doing business.

Eligible and Ineligible Input Tax Credit

Under the GST regime, businesses can claim input tax credit on a wide range of goods and services used for furtherance of business operations. However, certain goods and services are ineligible for input tax credit.

Eligible Input Tax Credit

Input tax credit is eligible for the following purchases:

• Products and services that support business operations
• Capital goods utilised in the course of conducting business
• Products and services that go into creating zero-rated or taxable supplies
• Products and services that are used to create exempt supplies but are later changed into taxable supplies

Ineligible Input Tax Credit

Input tax credit is not allowed on the following purchases:

• Products and services that are consumed personally
• Products and services required to produce exempt supplies
• Products and services covered by Composition Scheme GST payments
• Products and services that a taxable non-resident individual receives
• Products and services required for building real estate
• Products and services that are written off, destroyed, stolen, or lost
• Products and services for which taxes have been paid because of fraud, excessive refunds, or non-payment of taxes

Rules for Claiming Input Tax Credit Under GST

To claim input tax credit under GST, a business must fulfill the following conditions:

• The business must be a registered taxable person under GST
• The business must possess a tax invoice or any other specified tax paid document
• The goods or services must have been received by the business
• The supplier of the goods or services must have paid the tax
• The business must have filed the GST returns

Conditions for Claiming Input Tax Credit

To claim input tax credit under GST, a registered person must fulfill the following conditions:

• Be in possession of a tax invoice or any other specified tax paid document
• Have received the goods or services (including "bill-to-ship" scenarios)
• The tax must have been paid by the supplier
• The GST returns must have been filed
• If the inputs are received in lots or instalments, the ITC can be claimed only when the last lot or instalment is received
• Payment for the goods or services must be made within 180 days from the date of the invoice. If payment is not made within 180 days, the ITC claimed will be added to the output tax liability along with interest

Documents Required to Claim Input Tax Credit

To claim input tax credit, a business must possess the following documents:

• Invoice issued by the supplier of goods or services
• Invoice issued by the recipient along with proof of payment of tax
• A debit note issued by the supplier
• Bill of entry or similar document prescribed under the Customs Act
• Revised invoice
• Document issued by the Input Service Distributor (ISD)

Claiming Input Tax Credit on Imports

Under the GST regime, input tax credit is available on the Integrated Goods and Services Tax (IGST) and GST Compensation Cess paid on imports. However, input tax credit is not available on the Basic Customs Duty (BCD) paid on imports. To claim input tax credit on imports, a business must declare its GSTIN in the Bill of Entry.

Other Important Points Regarding Input Tax Credit

• Input Tax Credit requests can only be made by registered individuals if the invoice contains all necessary information
• If the tax paid on inputs is greater than the tax paid on output, the Input Tax Credit (ITC) may be carried forward or redeemed for a refund
• The remaining tax must be deposited in GSTR 3 with the government by the 20th of the following month after claiming input tax credit
• ITC claims are not allowed after September of the following fiscal year to which the invoice relates, or until the date the annual return is filed, whichever comes first.
• ITC on goods held in stock on the day immediately before the date from which they become liable to pay tax can be claimed by an individual who applied for GST registration within 30 days of becoming liable for registration

Conclusion

Input tax credit under GST is a vital mechanism that promotes efficiency, reduces the cost of doing business, and eliminates the cascading effect of taxes. By understanding the rules, eligibility criteria, and claiming process, businesses can optimize their tax liability and enhance their competitiveness in the marketplace.

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