The term "Input Tax Credit" refers to claiming a credit for GST paid on the acquisition of goods and services used in the course of business. The Input Tax Credit Mechanism is the backbone of GST and one of the most important reasons for its activation.
Because GST is a single tax levied across India (from the time goods/services are manufactured until they reach the final customer), the chain is not disrupted, and everyone can benefit from it, ensuring a smooth flow of credit.
GST is made up of the following taxes:
Allowed first for CGST payment, with the balance available for IGST payment. The use of CGST credit to pay SGST is not permitted.
Allowed first for SGST/UTGST payment, with the balance available for IGST payment. The use of SGST/UTGST credit for CGST payment is not permitted.
Allowed first for IGST payment, then for CGST payment, and finally for SGST/UTGST payment.
ITC can only be used for business-related goods and services. ITC cannot be claimed if utilized for non-business (personal) purposes or to make exempt supplies. Aside from these, there seem to be more instances in which ITC will be reversed.
In the following situations, ITC will be reverted
The ITC claimed by the individual must match the information provided by his supplier in his GST return. Following the completion of the GSTR-3B, any differences would be communicated to the supplier and recipient. Learn how to reconcile GSTR-2A returns in our article on GSTR-2A Reconciliation.
A principal manufacturer may send goods to a job worker for further processing. For instance, a shoe manufacturer may deliver half-finished shoes (the top section) to workers who complete the soles. The major manufacturer will deduct the tax paid on the acquisition of such goods sent on job work in this circumstance.
Under GST, an input service distributor (ISD) might be the registered person's head office, a branch office, or a registered office.
ISD collects input tax credits on all purchases and distributes them to all recipients (branches) under various headings such as CGST, SGST/UTGST, IGST, or cess.
This is true in circumstances of company mergers, acquisitions, and transfers. The transferor will have ITC handed on to the transferee at the time of the business transfer.