Input Tax Credit
7th Feb, 2019
- Concerned over a decline in GST revenues, tax officials are likely to examine the high usage of input tax credit (ITC) to set off tax liability by businesses.
- The issue of high ITC was flagged at the meeting of the Group of Ministers (GoM) which was set up by the GST Council to look into the reasons for revenue shortfall being faced by a large number of states.
- Availing ITC ideally should not result in loss of revenue but there could be possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
What is Input Tax Credit (ITC)?
- ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.
- Goods and Services Tax (GST) is an integrated tax system where every purchase by a business should be matched with a sale by another business. This makes flow of credit across an entire supply chain a seamless process.
How does ITC WORK?
- When a trader sells a good to consumers he collects GST based on the HSN of the good sold and the place of destination. Let us assume that the MRP of the good is INR 1000 and the rate of applicable GST is 18%. The consumer will therefore, pay a total of INR 1180 for the good which includes a GST of INR 180. Without ITC, the trader will have to pay INR 180 to the government. With input tax credit or ITC, the trader can reduce the total tax that it will have to pay the government. This is how it works.
Who can claim Input Tax Credit?
- ITC can be claimed by a person registered under GST only if he fulfils all the conditions as prescribed.
- The dealer should be in possession of tax invoice
- The said goods/services have been received
- Returns have been filed.
- The tax charged has been paid to the government by the supplier.
- When goods are received in installments ITC can be claimed only when the last lot is received.
- No ITC will be allowed if depreciation has been claimed on tax component of a capital good
- A person registered under composition scheme in GST cannot claim ITC.
What can be claimed as ITC?
ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for: Personal use; Exempt supplies; Supplies for which ITC is specifically not available
Reversal of Input Tax Credit
ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from these, in the following situations ITC will be reversed:
- Non-payment of invoices in 180 days– ITC will be reversed for invoices which were not paid within 180 days of issue.
- Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.
- Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.
- Capital goods partly for business and partly for exempted supplies or for personal use – This is similar to above except that it concerns capital goods.
- ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.