What is Input tax credit & how to file it? What are the benefits associated with ITC.
Input tax credit (ITC) under GST is a beneficial scheme that was introduced within the framework of goods & services tax (GST). It is the credit which is given to the taxpayer for the taxes which (s) he had paid towards the input which is used in the manufacturing of the product.
Input tax credit is a way by which one can effectively eliminate the cascading effect on the indirect tax. The concept of ITC existed in the previous version of service tax/VAT in India but now with the introduction of GST its scope has been widened.
Who can claim ITC?
A manufacturer/supplier of goods or services OR an e-commerce operator OR any of the persons registered under GST can claim ITC on the purchase of inputs.
[Note: One can claim ITC under GST only if the good & services purchased is for business purpose]
What are some of the salient features of ITC under GST?
A.) ITC under GST can be availed for those goods/services, which are purchased for business purposes.
B.) Pre-requisites to avail ITC by a registered person are:
- Tax invoice or any other document specifying tax payment information.
- The goods or services must have been received & should not be accrued.
- Supplier/manufacturer has actually deposited the tax.
- When the last lot is received (if lot system is prevailing).
C.) Documents, on the basis of which ITC is availed:
- Debit note issued by supplier.
- Entry bill or as prescribed under Customs Act.
- Invoice issued by a supplier of goods/services.
- Input Service Distributor issued the documents.
- Invoice along with proof of tax payment issued by the recipient.
D.) Supplies under which ITC is not available are as follows:
- Motor vehicles and other conveyances.
- Goods/services provided in connection with:
- food & beverages, catering, health services, cosmetic & plastic surgery
- Life insurance, health insurance except where it is obligatory
- Club, health & fitness centre membership
3.) Contractual services hired for construction of property (immovable).
4.) Goods/services
- Falling under GST composition scheme.
- Received for private/personal consumption.
- Received for the purpose of building immovable property.
5.) Tax paid as an outcome of short payment on account of fraud, suppression, seizure, detention.
Some of the benefits associated with Input tax credit (ITC)?
- Reduce the indirect tax burden on purchases of the registered taxpayers.
- Mechanism of multi-stage tax which is collected at every stage.
- Prevents double taxation & it subsequent cascading effect.
How to avail Input tax credit under GST mechanism?
- Payment in lieu of Integrated Goods & services tax (IGST)
- Payment in lieu of Central Goods & services tax (CGST)
- Payment in lieu of State Goods & services tax (SGST)
[Note: Take Input tax credit from IGST first and then considers ITC from CGST & SGST; if ITC from IGST is not sufficient]
Input tax credit can be better understood with the help of an example:
For instance consider Mr ‘X’ who purchased goods worth Rs. 20,000. Prevailing GST@18% on the product so purchased is Rs. 3600. Now he is planning to sell the goods worth Rs. 25,000; GST Payable @18% Rs. 4500.
In this case the Net GST Payable at the end of the transaction by Mr ‘X’ would be calculated as follows:
Outward GST Payable: 4500
(-) GST paid on purchases: 3600
Net GST Payable through cash: 900