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What exactly is an Input Tax Credit?

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.

What kind of ITC can’t be claimed?
  • Personal use.
  • Exempt supplies.
  • Supplies for which ITC is not available.

CGST/ SGST/ UTGST/ IGST

GST is made up of the following taxes:

  • The Central Goods & Services Tax (CGST) is a tax charged on an intra-state or intra-union territory to supply goods, services, or both
  • The State Goods and Services Tax (also known as State Tax) is a tax imposed on supply goods, services, or both within a single state.
  • The Union Territory Goods & Services Tax (UTGST) [also known as Union Territory Tax] is levied on goods and services supplied within a single union territory.
  • The Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] is levied on the supply of goods or services between states.

Input Tax Credit settlement allowed in the following way

Credit of CGST

Allowed first for CGST payment, with the balance available for IGST payment. The use of CGST credit to pay SGST is not permitted.

A credit of SGST/UTGST

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.

A credit of IGST

Allowed first for IGST payment, then for CGST payment, and finally for SGST/UTGST payment.

The documents that can be used to claim the ITC

  • Supplier of goods or services, or both, issues an invoice.
  • The supplier has issued a debit note.
  • Under the Customs Act, a bill of entry or similar document is required.
  • An invoice that has been updated.
  • Document issued by the Input Service Distributor.

Input Tax Credit Reversal

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

  • Non-payment of invoices within 180 days : If invoices are not paid within 180 days after issue, the ITC will be reversed.
  • Seller issues a credit note to ISD : The ITC that was reduced as a result of the credit note would be reversed if the seller issued a credit note to the HO.
  • Inputs used for both business and non-business (personal) purposes : This category applies to companies that are using inputs for both business and non-business (personal) purposes. ITC must be reversed proportionately in the input goods/services used for personal use.
  • Capital goods used in part for business and part for exempted supply or personal use : This is identical to the above, but it only applies to capital goods.
  • The ITC reversed is less than the statutory amount : This is determined when the yearly return is filed. If the total ITC on exempted/non-business inputs exceeds the ITC reversed during the year, the difference is applied to the output liability. Interest will be charged.
ITC reconciliation

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.

ITC cases that are unique

Under GST, ITC is offered for capital goods.
  • Capital goods used only for creating exempted items
  • Capital goods used exclusively for non-business (personal) reasons are not eligible for ITC.
ITC on the Job

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.

Input Service Distributor Distributor ITC (ISD)

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.

ITC on Business Transfer

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.

Benefits of ITC Reconciliation for Taxpayers

  • Providing clients with access to examine and manage their own ITC reconciliation
  • Assist clients in identifying problematic suppliers and following up with them.
  • Correcting purchase records or GSTR 2A mistakes.
  • Notifying the provider of any errors (if any) on the client's behalf.
  • Get an input tax credit for missing invoices from your client's books.