Meaning of ITC can be understood by breaking the word Input tax credit into following
Input: It Includes, Inputs (Relating to goods other than capital goods), Input services, and Capital Goods which are used/Intended to be used in the course or furtherance of business.
The word Input tax means, GST paid by a registered person under Forward charge/Reverse charge and it includes Central tax, State tax, Union territory tax, and IGST paid on Imports however it does not include taxes paid under Composition Levy.
Input Tax Credit: Means Taking the Credit of Input Tax at the time of Output tax payment [Sec 2(63)]
Let’s say that a manufacturer purchases raw materials worth Rs. 1,00,000 and pays a GST of Rs. 18,000 on the purchase. The manufacturer then uses these raw materials to produce finished goods, which are sold for Rs. 2,00,000 with a GST of Rs. 36,000.
In this case, the manufacturer can claim Input Tax Credit of Rs. 18,000 (the GST paid on the purchase of raw materials) against the GST liability of Rs. 36,000 on the sale of finished goods. So, the manufacturer only needs to pay Rs. 18,000 in GST to the government, instead of the full GST liability of Rs. 36,000.
Under the Goods and Services Tax (GST) regime, Input Tax Credit (ITC) can be claimed by businesses for the taxes paid on inputs used for producing or supplying goods or services. However, there are certain circumstances under which the ITC claimed by a business may need to be reversed or blocked.
ITC reversal amount due to Rules 42 & 43 or for any other reasons in Table 4B of the GSTR-3B. Also, you have to make annual calculations on ITC reversal and mention the same in GSTR-9.
Read our detailed blog on Input Tax Credit Rule 36(4)
The recipient of goods or services can claim ITC in their monthly or quarterly return for the tax period in which they received the invoice or the debit note, whichever is earlier.
The due date for filing of annual return for a particular financial year is 31st December of the next financial year or the actual date of filing of the annual return whichever is earlier.
Eligibility: The recipient can claim the credit of tax paid under the reverse charge mechanism only if they are registered under GST.
Inclusion in GSTR-2A: The tax paid by the recipient under the reverse charge mechanism will be reflected in their GSTR-2A, which is a system-generated statement containing the details of all inward supplies of goods or services. The recipient can view the tax paid under the reverse charge mechanism in their GSTR-2A and reconcile it with their records.
Claiming Credit: The recipient can claim the credit of tax paid under the reverse charge mechanism in their GSTR-3B, which is a monthly return that needs to be filed by registered taxpayers. The credit can be claimed in the same month in which the tax was paid, subject to the condition that the tax invoice has been received by the recipient.
Utilization: The credit of tax paid under the reverse charge mechanism can be utilized for payment of the output tax liability of the recipient. The credit cannot be used for payment of tax liability on exempt supplies.
Inputs sent for job work: If a registered person sends inputs or capital goods to a job worker for further processing or testing, they can claim the ITC on such inputs or capital goods.
Inputs used for making exempt supplies: If a registered person is engaged in making both taxable and exempt supplies, they can claim the ITC on inputs used for making taxable supplies.
Inputs used for making zero-rated supplies: If a registered person is engaged in making zero-rated supplies, i.e., supplies to SEZ (Special Economic Zones) or exports, they can claim the ITC on inputs used for making such supplies.
Inputs used for branch transfers: If a registered person has multiple branches, they can claim ITC on inputs used for transfers between branches.
Motor Vehicles: ITC is not allowed for motor vehicles and other conveyances except when they are used for the furtherance of business or in the case of transport of passengers or goods.
Food and beverages, outdoor catering, beauty treatment, health services, etc.: ITC is not allowed on goods or services used for personal consumption or employees such as food and beverages, outdoor catering, beauty treatment, health services, etc.
Membership of club, health, and fitness center: ITC is not allowed on the membership of a club, health and fitness center, and such other services which are not directly related to the business.
Rent-a-cab, life insurance, and health insurance: ITC is not allowed on rent-a-cab services, life insurance, and health insurance except where it is mandatory under any law.
Works contract services for the construction of immovable property: ITC is not allowed on works contract services for the construction of an immovable property (except in certain cases).
As per Rule 88A of CGST Rules, following is the order for the Utilisation of ITC
|1st set off from
|2nd set off from
|Then CGST & SGST credit in any Order
Conclusion: From above we can see that IGST credit should be exhausted before using any other credit balance.
Let us understand this with an example:
We have the credit of IGST – Rs. 200, CGST – Rs. 50, SGST – Rs. 50 and Output liability of IGST – Rs. 100, CGST – Rs. 100, SGST – Rs. 100. Now Calculate the Order of utilisation as per the above rule?
Ans: IGST credit of 200 shall be utilized towards the payment of output liability of Rs. 100 of IGST and Rs. 100 of CGST & This will lead to the accumulation of credit under CGST of Rs. 50 that can be carried forward along with this the SGST output liability of Rs. 50 will remain which shall be paid in cash.
As per Sec 16(4) of the CGST act, the Maximum time Limit to claim ITC shall be earlier than the following:
However, as per Notification no.18/2022 of Central Tax dt:28-09-2022, the Maximum time Limit to claim ITC shall be earlier than the following:
Under the Goods and Services Tax (GST) regime, Input Tax Credit (ITC) can be claimed by businesses for the taxes paid on inputs used for the production or supply of goods or services. However, there are certain circumstances under which the ITC claimed by a business may need to be reversed or blocked.
Input tax credit (ITC) is the credit that a registered person can claim for the tax paid on purchases of goods and/or services used for business purposes. The ITC can be claimed against the output tax liability.
A registered person who is eligible for input tax credit can claim it. To claim ITC, the person must be registered under GST, and the goods or services purchased must be used or intended to be used for business purposes.
To claim input tax credit in GST, the following conditions must be satisfied:
The person claiming the credit must be registered under GST.
The goods or services on which ITC is claimed must have been used or intended to be used for business purposes.
The person claiming the credit must have a valid tax invoice or debit note or any other prescribed document.
The tax charged on the invoice or debit note must have been paid to the government by the supplier.
The person claiming the credit must have received the goods or services.
The return for the relevant period must have been filed.
No, input tax credit cannot be claimed for all purchases. The following are some of the purchases for which ITC cannot be claimed:
Motor vehicles and other conveyances except when used for transportation of goods or passengers or for providing taxable services like driving school.
Goods and/or services used for personal consumption or for non-business purposes.
Goods and/or services used for exempt supplies.
Goods and/or services on which GST has not been paid or have been paid at a concessional rate.
No, input tax credit cannot be claimed for purchases made before registration under GST.
Input tax credit can be claimed in GST by showing the details of the eligible ITC in the relevant column of the GST return and reducing the amount of ITC claimed from the output tax liability.
Yes, input tax credit can be claimed in the next financial year if it has not been claimed in the previous financial year.
If input tax credit is claimed incorrectly in GST, it can lead to recovery of the credit with interest, penalty, and/or prosecution. Therefore, it is important to claim ITC correctly and ensure that all conditions for claiming ITC are satisfied.
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