Input Tax Credit (ITC) under GST law Simplified for you!

The Input Tax credit, generally referred to as ITC, is an option available to reclaim credits on the Input tax paid for the purchase of some goods or services. This credit can be used to settle any outstanding output tax by the taxpayer.

It is one of the most beneficial features of GST law that prompts business owners to come under GST net to be compliant.

In this article, I will be talking about everything that you need to know about ITC under GST. This could be a lengthy discussion, so brace for it!

What is ITC and how it works?

As mentioned earlier, it’s a mechanism that allows you to reclaim the tax you paid on the purchase of some goods or services and use it to settle your outstanding tax liability. 

Let’s understand how.

Whenever you buy some goods or services, you pay a certain amount in the form of GST. The ITC mechanism allows you to reclaim this tax paid by you on purchase of any item in the form of credits. 

When you sell any goods or service, you will have to pay a certain amount in the form of GST to the Government. You can use those reclaimed credits or ITC against your outstanding tax liability.  

Let me give you an example. 

You are a business owner, and you have bought an item X and item Y. You have paid INR 1800 as GST on item X and INR 2400 as GST on item Y. So the total tax that you paid is INR 4200. You can claim this amount in the form of ITC.

Now, you are selling item Z and pay INR 5000 as the output tax. You can utilize your ITC availed during the purchase of item X and Y to adjust our outstanding tax liability of INR 5000.

So ultimately you will have to pay just INR 800 in the form of GST.

What are the mandatory conditions for claiming ITC?

Only a registered taxpayer under the GST regime can claim ITC by satisfying the following conditions

  • All the periodic returns have been filed
  • The supplier has paid the outstanding tax on the goods or service in the question to the Government
  • The recipient has received the goods and service in the question.
  • A buyer can claim ITC on the goods or services that he bought on instalments only after the full amount is paid to the seller. 

Under what conditions ITC cannot be claimed?

Following are the conditions when ITC cannot be claimed

  1. If the buyer is not registered under the GST regime, he/she/it cannot claim ITC.
  2. When buying capital goods, if the buyer claims depreciation, ITC cannot be claimed.
  3. If a buyer is registered under the composition scheme, he/she/it cannot claim ITC. 

How to claim ITC?

When a taxpayer prepares monthly return form of GSTR3B, the details of any ITC has to be mentioned in table 4 of the form. 

This form contains three sections for ITC, viz. eligible ITC, ineligible ITC and ITC reversed. 

Once you fill this detail in your form and upload the return, ITC will be credited into your “Electronic Ledger Account”. You can view this by logging into your GST account. 

As per the new law, the buyer can avail up to 20% of the total ITC by filing GST-3B. The eligible ITC will be as per the data uploaded by the seller in GSTR-2A. 

In this initial stage of GST, buyers were eligible to claim the full amount of eligible ITC based on their GSTR-3B. But from October 2019, Department has mandated that the maximum provisional ITC that a buyer can claim is 20% of the total ITC reported in GSTR-2A. 

So it’s better to check and re-check the data of GSTR-2A with their purchase register to avoid any issue.

What is Reversal of ITC?

Department reserves the right to reverse the ITC offered to the taxpayer in the following conditions.

  1. If the seller issues a credit note to Input Service Distributor, the eligible ITC will be reduced. In this case, the difference in ITC will be reversed.
  2. If the buyer fails to pay invoices within 180 days of issuance, the Department will reverse the claimed ITC. 
  3. If ITC is claimed on the goods and services are being consumed for the purpose other the business purpose, ITC will be reversed.
  4. If the total ITC reversed during the year on inputs of exempted or non-business purposes is less than the actual ITC eligible for reversal, the difference will be added to output tax liability along with interest.

What documents are necessary to claim ITC?

You will need the following documents to claim ITC:

  1. Invoice of the goods or service that you purchased from the supplier
  2. If a supplier has issued a debit note, it is required
  3. A bill of supply if the amount is less than INR 200
  4. Credit note or Invoice issued by ISD

Looking for a complete GST solutions?

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