As you’re aware of the benefits of the GST system, the input tax credit in GST is one of them.
Input tax credit (ITC) is a feature of the Goods and Services Tax (GST) system in India. It is beneficial for those businesses that are registered under GST.
But, what actually Input Tax Credit means? Keep reading to learn everything about Input Tax Credit under GST with example.
What is Input Tax Credit under GST?
Input Tax Credit is a mechanism under GST that allows businesses to claim credit for the GST or tax paid on their purchases (inputs). Inputs can be anything, like raw materials that are used in a business.
The claimed credit can be further used to offset the GST liability on the output, or final products or services, that the business supplies to its customers.
The benefit of ITC is that it reduces the tax burden on businesses. Additionally, ITC promotes compliance with GST by providing an incentive for businesses to pay their GST on time and in full.
By claiming ITC, businesses can reduce the GST (tax) they have to pay on their output, which can result in cost savings and increased profitability.
Summary
Input Tax Credit in GST Example
Understand the concept of ITC with the example given below:
For example, consider a business (ABC Ltd.) that purchases raw materials worth INR 100,000 and pays INR 10,000 as GST on the purchase.
The business uses these raw materials to manufacture a final product that it sells to a customer for INR 200,000, and charges INR 20,000 as GST on the sale.
The business can claim ITC of INR 10,000 on the GST paid on its purchases (of raw materials) and reduce its GST liability on the output to INR 10,000 (20,000 – 10,000).
It simply means that now, the business will theoretically be paying only INR 10,000 as GST on the output. Isn’t it great? By availing ITC, business can SAVE taxes in this manner.
In this way, the business is able to pass on the GST paid on its purchases to its customers and avoid paying tax on tax.
Explain the Significance of ITC under GST
Input tax credit (ITC) helps registered businesses to recover the GST paid on their purchases and inputs.
ITC is intended to eliminate the cascading effect of taxes, where the same product or service is taxed multiple times at different stages of production and distribution.
Overall, it is an important mechanism for reducing the burden of taxes on businesses and promoting economic efficiency. It also helps to simplify the tax system by eliminating the need for businesses to pay multiple taxes at different stages of production and distribution.
Benefits of Input Tax Credit in GST
Input tax credit in GST provides a number of benefits to businesses and the economy as a whole.
Here are some of the main benefits of Input Tax Credit in GST:
1. Reduces the burden of taxes
ITC allows businesses to recover the GST paid on their purchases and inputs, which helps to reduce the overall burden of taxes on businesses.
2. Eliminates the cascading effect of taxes
ITC helps to eliminate the cascading effect of taxes, where the same product or service is taxed multiple times at different stages of production and distribution.
3. Improves efficiency
ITC helps to improve efficiency in the economy by reducing the cost of doing business and eliminating the need for businesses to pay multiple taxes at different stages of production and distribution.
4. Increases transparency
ITC helps to make the tax system more transparent, as businesses are able to see the exact amount of GST paid on their purchases and inputs.
This can make it easier for businesses to understand their tax obligations and can improve compliance.
5. Simplifies the tax system
ITC helps to simplify the tax system by eliminating the need for businesses to pay multiple taxes at different stages of production and distribution.
While ITC is not for individuals (normal consumers), the indirect benefit of ITC may be passed on to consumers in the form of lower prices for goods/services. This is because, due to ITC businesses are able to reduce their costs by claiming ITC.
Though the ITC mechanism appears to be good, it is far from ideal. To get more insights on some disadvantages of the GST system in India, check why GST is not suitable.
How to claim ITC under the GST System?
Here is the step-by-step process for claiming ITC under GST:
- Obtain a GST registration: In order to claim ITC, a business must first obtain a GST registration.
- Keep records of purchases and inputs: Businesses need to keep records of their purchases and inputs, as these will be required in order to claim ITC.
- File GST returns: Businesses are required to file GST returns on a regular basis, typically on a monthly or quarterly basis. In the GST return, they must declare the GST paid on their purchases and inputs and claim ITC on this amount.
- Claim ITC: In order to claim ITC, businesses must provide details of the GST paid on their purchases and inputs in the GST return. The business can then use the ITC claimed to offset the GST liability on their supplies.
- Verify and reconcile ITC: The tax authority may verify the ITC claimed by the business, and may request additional documentation to support the claim. It is important for businesses to keep accurate records and to be able to provide supporting documentation in order to facilitate the verification process.
For more details on Input Tax Credit in GST, check the Official website of Central Board of Indirect Taxes & Customs for help. Besides, you can also read their PDF, explaining Input Tax Credit in GST in more detail.
Restrictions in availing ITC
There are certain restrictions on the availability of ITC under GST. ITC is not available for the following:
- Purchase of goods or services for personal consumption.
- Purchase of goods or services that are not used in the course or furtherance of the business.
- Purchase of goods or services that are not taxable under GST.
- Purchase of goods or services that are not covered by a valid invoice or other prescribed documents.
- Purchase of goods or services that are not reported in the GST returns filed by the business.
- Purchase of goods or services from an unregistered supplier.
- Purchase of goods or services that are not eligible for ITC as per the GST law.
Conditions to claim ITC
To claim ITC, a business must satisfy the following conditions:
- The business must be registered under GST.
- The GST paid on the purchases must be shown in the GST returns filed by the business.
- The purchases must be used in the course or furtherance of the business.
- The supplier of the purchases must have paid the GST and filed the returns.
- The business must have the invoices or other prescribed documents as evidence of the purchases and the GST paid.
Rules to consider while availing ITC
Under the Goods and Services Tax (GST) system in India, there are several rules that businesses must follow in order to claim Input Tax Credit in GST.
Some of the key rules for ITC are as follows:
- ITC can be claimed only when the GST on the output is paid.
- ITC can be claimed only up to the GST liability on the output.
- ITC can be claimed only if the GST on the output is paid within a specified time period (generally within 180 days from the date of supply).
- ITC can be claimed only if the GST on the output is paid in the same tax period in which the GST on the input was paid.
- ITC can be claimed only if the GST on the output is paid in the same state or union territory in which the GST on the input was paid.
- ITC can be claimed only if the GST on the output is paid in the same tax category (central GST or state GST) as the GST on the input.
- ITC can be claimed only if the GST on the output is paid in the same tax head (CGST or SGST) as the GST on the input.
- ITC can be claimed only if the GST on the output is paid at the same rate as the GST on the input.
- ITC can be claimed only if the GST on the output is paid on a taxable supply (i.e., a supply that is not exempt or zero-rated).
- ITC can be claimed only if the GST on the output is paid on a supply that is not prohibited by law.
Businesses must ensure that they comply with these rules in order to claim ITC correctly and avoid any penalties or disputes.
What is Input Tax Credit in simple words?
In simple words, it allows businesses to offset the taxes paid on inputs against the taxes payable on the sale of goods and services, reducing the overall tax burden on the business.
Who all are eligible to claim the Input Tax Credit?
Under the Goods and Services Tax (GST) system in India, businesses that are registered under GST are eligible to claim Input Tax Credit in GST system.
What are the documents required to claim Input Tax Credit?
To claim Input Tax Credit in GST system in India, a business must have the following documents:
1. Invoices or bills of supply: These are documents issued by the supplier of the goods or services, and they should contain the details of the supply, such as the description of the goods or services, the quantity, the value, and the GST charged.
2. Debit notes and credit notes: These are documents issued by the supplier to the recipient in case of any amendment to the original invoice or bill of supply, such as a reduction in the value or the GST charged.
3. Receipt vouchers: These are documents issued by the recipient to the supplier in case of advance payment or advance receipt of goods or services.
4. Delivery challans: These are documents issued by the supplier to the recipient in case of partial supply of goods or services, or in case the goods are sent by the supplier to a job worker for further processing.
5. Other documents as prescribed by the GST law: These may include documents such as the e-way bill (in case of movement of goods), the export invoice (in case of exports), and the import invoice (in case of imports).
It is important for businesses to maintain accurate and complete records of the above documents, as they are required as evidence to claim ITC.
Summing up ITC in short
Overall, ITC is an important mechanism for reducing the burden of taxes on businesses and promoting economic efficiency in the GST system.
It helps businesses to recover the GST paid on their purchases and inputs, which can reduce the overall cost of doing business and improve competitiveness.
