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What is input tax credit?

  • Input tax credit is the term used to describe the amount of central tax (CGST), state tax (SGST), integrated tax (IGST), or cess that a person who is registered for GST has paid on the delivery of goods or services. The IGST imposed on imported goods and the tax paid on a reverse charge basis are both included in the GST input tax. Input tax, however, does not include tax paid under the composite taxation system.


  • To reduce the tax owed after a sale, a business can use the tax it pays on purchases as an input tax credit. Up until it reaches the consumer, value added at each stage of the supply chain forms the basis for the taxing charge.


  • In order to combat the cascading effect of the tax obligation that is paid while purchasing supplies such as plants, machinery, plants, and consumables, the Commodities and Service Tax Act levies a tax on both goods and services based on the concept of value addition. The tax liability is compensated for using the input tax credit.


  • Every individual in the supply chain who has registered for GST participates in control, collects the GST tax, and remits the money they have earned. The tax input credit is offered to offset tax paid on the acquisition of the raw materials, consumables, goods, or services that are used in the production, supply, and sale of goods or services in order to avoid double taxation and the cascading effect of the tax.


  • By Utilizing the input tax credit mechanism in the incidence of tax, the firm can achieve tax neutrality and ensure that the input tax component does not affect the cost of production or the cost of providing goods and services.

Eligibility criteria for Input tax credit

Who can claim input tax credit?

A person who is registered for GST may only claim the input tax credit if they meet the requirements listed below:

  • Only those with a GST registration and who have submitted their GSTR 2 returns may claim the input tax credit.

  • The dealer must be in possession of the tax invoice or debit note issued by the input supplier or the input services.

  • Receiving the aforementioned products, services, or both is required.

  • The GST payment due to the government for this supply has been made by the provider.

  • The input tax credit can only be used when the final batch of goods is received when they are purchased in instalments.

  • Input tax credits are not permitted.

  • If depreciation has been claimed on the tax component of a capital good, no input tax credit is permitted.

Documents required for claiming GST Input tax credit

What documents are required for claiming the GST input tax credit?


The following papers may be used to support an input tax credit claim made by a registered taxable person:

Step: 1 The supplier of the products or services must send an invoice.

Step: 2 A receipts for products and services provided by an unregistered dealer that is accompanied by an invoice. The reverse charge process applies to this supply. A supply made by an unregistered person to a registered person is what this mechanism includes.

Step: 3 The tax levied on a supply is reflected on a debit note that the supplier issues that is less than the tax due on that supply.

Step: 4 A bill of entry or comparable paperwork is also necessary to prove an integrated import tax.

Step: 5 A credit note or invoice provided by an input service distributor in accordance with GST regulations.

Step: 6 A supply bill from a provider of the exempted items, an exporter, or a dealer choosing a composition scheme.

Basic requisites for claiming the input tax credit

What are the conditions under which Input tax credit can be claimed?

For the GST input tax credit to be claimed, the following requirements must be met:

  • The person must be registered with the GST.

  • Either a tax invoice or a debit note issued by a registered supplier that includes the tax amount

  • Receiving the product or service is required.

  • The supplier is responsible for submitting the returns and paying the tax to the government.

  • When receiving items in lots or instalments, you may claim the input tax credit when you get the final lot or instalment.

  • If the input tax credit is not claimed within the allotted time, it will not be granted.

Claiming the Input tax credit

How to claim the Input tax credit?

Every regular taxpayer is required to include the amount in the GSTR 3B.

  • Up to 20% of the valid ITC reported by the supplier in the automatically generated GSTR 2A return may be claimed by the taxpayer as an input tax credit on a pro rata basis in the GSTR 3B. Before moving further with the GSTR 3B, the taxpayer must double-check the GSTR 2A data.

  • A taxpayer might claim any amount of the provisional input tax credit prior to October 9th, 2019. The Provisional Input Tax Credit is limited to 20% of the Eligible ITC available in the GSTR 2A, according to CBIC's notification, which is effective as of October 9, 2019.

  • This makes it crucial to match the purchase register with the GSTR 2A as the amount of input tax credit recorded in the GSTR 3B will be the sum of the actual ITC in the GSTR 2A and the provisional ITC, which is equal to 20% of the actual eligible ITC in the GSTR 2A.

Reversal of Input Tax Credit

In the situations listed below, the input tax credit may be reversed:

  • Failing to make payment to the supplier 180 days after the invoice's due date.

  • Whether inputs or capital assets, the items and services are employed for private consumption.

  • The products and services used to create or provide the exempt products or services.

  • Sale of equipment or capital items for which an input tax credit was claimed.

  • The input service distributor is the one who issues the credit notes.

  • According to section 17(5) of the Act, the supplies are not eligible.

  • The input tax credit is reversed when a registered regular dealer becomes a composite dealer.

  • Interest must be paid from the day the credit is used until the date the amount is reversed and paid. The reversed amount may be added to the output tax liability in the month in which it is reversed.

  • Reclaiming the reversed credit is not subject to any time restrictions.

Availing credit under Reverse Charge Mechanism

How to avail of the credit when the tax has been paid under the Reverse Charge Mechanism?

If the following requirements are met, an input tax credit may be claimed when tax is paid using the reverse charge mechanism in the same month that the payment is made.

  • Cash has been used to pay off the debt.

  • The products or services were utilized for commercial purposes.

  • Since an unregistered provider cannot produce a tax invoice, the purchases are self-invoiced.

Reconciliation of Input tax credit

The information given by the supplier in the GST return must match the input tax credit that the individual is claiming. Once the GSTR 3B is filed, the supplier and the recipient will be made aware of any differences if there are any.

Special cases of Input tax credit

Input tax credit for Capital goods

  • Capital goods used solely to manufacture exempt goods and solely for personal use are not eligible for ITC.

  • In this case, ITC will only be accepted if depreciation has been claimed on the capital goods' tax component.

Input tax credit on the Job work

A job worker may receive commodities from the primary manufacturer for further processing. ITC will be permitted in such circumstances on the following items sent to the job worker:

  • from a primary business location

  • Directly from the supplier of such goods' point of supply.

  • The main must receive the products back within a year to be eligible for the input tax credit.

The Input tax credit that is provided by the Input Service Distributor

  • The main office, a branch office, or the registered office of a person who is registered under GST can all be considered an input service distributor. On every transaction completed and given to every receiver, the input service distributor collects the input tax credit.

  • Input tax credit on the transfer of business

  • This is applicable to business transfers as well as amalgamations and mergers. At the time of the business transfer, the transferee will get the available input tax credit that belongs to the transferor.

Goods and Services not eligible for Input Tax Credit

The following commodities or services are not eligible for the input tax credit under GST:

  • Motor vehicles, unless they are given in the course of business or used to provide taxable services like:

1. The movement of passengers

2. The movement of goods

3. Providing instruction in operating, navigating, and flying such vehicles

4. Additional supplies of similar vehicles or modes of transportation

  • A registered taxable person may not use an inward supply of goods or services of a certain category to make an outward taxable supply of the same type of service, except in the case of outdoor catering, cosmetic and plastic surgery, beauty treatments, and health services.

  • Club, health, and fitness center membership

  • Rent a car, life insurance, and health insurance, unless the provision of such services by an employer is mandated by law.

  • Employees who are on vacation receive travel benefits such as leave or home travel discounts.

  • Other than plant and machinery, the main received goods and services for the building of real property, unless they were input services for the provision of work contract services.

  • other than plant and machinery, goods and services that a taxable person receives for building an immovable property on his account, even if they are utilized to develop their company.

  • Products and services that have received tax payments under the composition programmed.

  • products and services purchased for personal use

  • Goods that were given away as gifts or samples, or that were written off or disposed of.

  • Tax paid following the discovery of fraud, willful misrepresentation, or suppression.

  • Release of commodities that have been impounded or confiscated is taxed.

  • For the release of impounded goods, tax was paid.

  • Documents Required For GST Input Tax Credit Reconciliation

Documents Required For GST Input Tax Credit Reconciliation


INVOICE:

Invoice issues by the supplier and recipient of Goods and services.

DEBIT NOTES:

Debit note issued by the supplier of the tax charged is less than the tax payable concerning such supply.

BILL OF ENTRY:

A bill of entry or similar documents is required to document an integrated tax on imports.

CREDIT NOTES:

Credit note that is issued by an input service provider as per the rules under GST

SUPPLY BILL:

Supply bill by a dealer that is operating for a composition scheme or an exporter or a supplier of the exempted goods.

GST Input Tax Credit Reconciliation FAQ's


1. Is GST paid on a reverse charge basis eligible for input tax treatment?

Yes. The tax owed in connection with the reverse charge is covered by the definition of input tax.


2. What are the conditions of availing input tax credit?

Following four conditions are to be satisfied by the registered taxable person for obtaining ITC is in possession of tax invoice or debit note or such other taxpaying documents as may be prescribed; he has received the goods or services or both; the supplier has actually paid the tax charged in respect of the supply to the taxpayer is in possession of a tax invoice or debit note or such other tax-paying documents as may be prescribed. The taxpayer has received the goods or services or both. The supplier has actually paid the tax charged in respect of the supply to the government. The taxpayer has filed the GST return.


3. Can lost or damaged products be eligible for input tax credits?

No, one cannot claim an input tax credit for items that have been written off, lost, stolen, destroyed, or destroyed by fire. Additionally, input tax credits for items given as presents or free samples are not permitted.


4. How do I obtain ITC on products or services used partially for commercial purposes?

The registered person may claim the input tax credit for products or services that are solely related to business purposes. The GST guidelines outline the process for calculating qualifying input tax credits.


5. What takes place if there is an invoice match error during reconciliation?

The supplier and recipient would be informed in the event of a mismatch. If the discrepancy is not fixed, the sum will be added to the recipient's output liability in the return for the month after the month in which the discrepancy was reported.


6. Is meeting the only requirement for input tax credit?

No, the input tax credit is only permitted for a two-month period proviso. The system compares the supply details, and any differences are reported to the recipient and concerned supplier. If the mismatch persists, the ITC received will be automatically reversed.


7. Can GST be paid using a temporary input tax credit?

No, the payment of self-assessed output tax in the return is the sole use permitted for the provisionally approved input tax credit.


8. When should I use my input tax credit?

Only purchases and costs that are made for consumption, use, or supply in business activities are eligible for ITC. The expenses or purchases must be reasonable in terms of quality, nature, and cost in order to qualify for ITC.


9. How much ITC is eligible for claim?

Taxpayers are permitted to claim up to 20% of the admissible ITC that the supplier reports in the automatically prepared GSTR 2A return.

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