All About The Input Tax Credit (ITC) is an essential concept under the Goods and Services Tax (GST) system in India. It allows businesses to claim credit for the tax paid on inputs i.e. raw materials, capital goods, and services.
Here is an overview of the Input Tax Credit –
Meaning and Purpose
Input Tax Credit refers to the mechanism of claiming credit for the GST paid on inputs. The purpose of ITC is to avoid the cascading effect of taxes. It helps the business to offset the input tax against its final tax liability.
Eligibility for Input Tax Credit
A business must fulfil the following criteria to be eligible for Input Tax Credit :
- The businesses must register under GST
- Must have a valid tax invoice or other prescribed documents
- The inputs claimed must only be for business purposes only
Conditions for Availing of Input Tax Credit
The conditions for availing Input Tax Credit are:
- The supplier must furnish the required details of the transaction in their GST returns and the tax paid to the government.
- The recipient should have received the goods or services and the tax invoice issued by the supplier.
- The recipient should have filed their GST returns and included the details of the inward supplies in their returns.
Use of Input Tax Credit
Uses of Input tax credit are as follows:
- Can be utilized to offset the tax liability on outward supplies, i.e., the tax payable on the sale of goods or services.
- Can be used to pay the output GST liability, including Integrated GST (IGST), Central GST (CGST), State GST (SGST), or Union Territory GST (UTGST), in the respective proportion.
- The use of ITC follows a specific hierarchy: IGST credit is first utilized against IGST followed by CGST credit against CGST, and SGST/UTGST credit against SGST/UTGST.
Reversal and Blocked Credits
There are certain circumstances where the ITC availed needs to be reversed or cannot be claimed. For instance, if the recipient fails to pay the supplier within 180 days from the date of invoice, the ITC availed needs to be reversed. Blocked credits include expenses such as personal use items, certain motor vehicles, transportation of certain goods, etc., for which ITC cannot be claimed.
Documentation and Record Keeping
Businesses must maintain proper records of invoices, debit/credit notes, and other supporting documents to substantiate their claim for ITC. All invoices and documents must contain the necessary details as prescribed under the GST rules.
Businesses must understand the rules and provisions regarding Input Tax Credits to ensure compliance and optimize their tax liabilities. Regular reconciliation of purchase records with GST returns, accurate documentation, and periodic ITC audits can help businesses effectively manage their ITC claims. Consult with our GST experts at FileMyReturn who can provide further guidance on understanding and maximizing the benefits of Input Tax Credit under the GST regime.