Input Tax Credit under GST

India’s taxation system has evolved over the years. The latest significant development in this sphere is the Goods and Services Tax (GST). A crucial component of GST is the Input Tax Credit (ITC), which is designed to allow effortless credit flow. Here we have entailed input tax credit meaning, its features, importance and much more.

What is Input Tax Credit (ITC) under GST

The amount of GST paid by a registered person on the purchase of goods or services used for business purposes is known as input tax credit, or ITC. The input tax credit mitigates the registered person's GST liability for the sale of goods or services.

Let's understand input tax credit under GST with example.

Suppose your firm purchased goods with an input tax component of Rs 20,000 and sold goods with an input tax component of Rs 40,000. Your firm would owe Rs 20,000 in net tax (which is determined by deducting the input tax credit from the output tax collected).

Therefore, businesses, such as manufacturers, traders, e-commerce, and others mentioned in the GST Act, can benefit from the input tax credit. It lowers tax payment obligations by enabling people to get a reimbursement for the taxes they paid on their purchases. This practice helps promote tax compliance, avoids double taxation, and simplifies the taxation journey for individuals and firms.

In short, the total tax outgo is reduced to the extent of the input tax credit. The taxpayer needs to pay only the balance.

Ineligible Input Tax Credit

However, one needs to meet certain criteria to avail of the benefits of the input tax credit deduction. All input tax credits cannot be claimed for deduction under GST. Following are instances where input tax credits are not available for claims to the taxpayer.

• GST paid on automobiles and various modes of transportation unless they are used for tasks like cargo transportation or training.
• GST paid on goods or services used for personal consumption by the registered person or their employees.
• GST paid on food and beverages, medical services, cosmetic and beauty treatments. GST cannot be charged if it is part of a combined supply and used to make an outward taxable supply.
• GST paid on goods or services received by a Non-Resident Indian or NRI taxable person, except for those on which Interstate Goods and Services Tax (IGST) is payable.
• GST paid for club, health, and fitness centre membership dues.
• GST paid on travel benefits extended to employees on vacation like home travel commission  or leave is not eligible for ITC claim. However, if such travel is for business purposes, ITC exemption is available.

Input Tax Credit on Capital Goods

Capital goods refers to assets used by businesses to generate revenue. Under the GST, taxpayers can benefit from input tax credit on capital goods. It enables the claim of the GST paid on capital goods—like machinery, equipment, tools, and vehicles—that are purchased and used for commercial purposes.

But, in order to receive ITC on capital items, there are a few requirements and limitations:

• Capital goods cannot be handled as business expenses; they must be capitalised in the books of accounts.
• The ITC on capital goods must be lowered by 5% every quarter, starting from the invoice date.
• The tax component of the capital goods cannot be claimed as depreciation.

Who can Claim Input Tax Credit under GST - Eligibility Criteria

One can claim the input tax credit for taxes paid on supplies of goods or services, provided the individual or firm has -

• Valid Tax Invoice

The registered individual must have a valid tax invoice or other official tax-paying document to be eligible for the credit.

• Paid Tax 

For an individual to be eligible for the credit, the supplier must have paid the tax amount.

• Received the Products

The credit can only be used once the registered individual has received the goods or services.

• Filed and Submitted the Return

To be eligible for ITC, the registered person must file and submit the required return.

• Paid the Vendor Within 180 days 

The recipient is required to pay the supplier the total cost of the products or services taken on credit plus applicable taxes within 180 days of the invoice date. If left unpaid, the recipient's output tax due will be increased by the credit amount plus interest. Nevertheless, the beneficiary can reclaim the credit after payment is received.

Time Limit to Claim Input Tax Credit under GST

As per Section 16(4) of the CGST Act, 2017, the last date to avail ITC for the invoices of a particular financial year would be the earlier of the two dates below:

• 30th November, following the end of the relevant financial year 
• Annual Return for the relevant financial year