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.
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.
Input Tax Credit Example
A manufacturer purchases raw materials worth ₹10,000 from a registered supplier and pays 18% GST of ₹1,800. When the manufacturer sells the finished product for ₹15,000, they collect 18% GST of ₹2,700 from the customer. The manufacturer is eligible to claim an Input Tax Credit (ITC) of ₹1,800 for the GST paid on the raw materials.
Instead of paying the entire ₹2,700 to the government, the manufacturer can claim this ITC. This reduces their net GST liability to ₹900 (₹2,700 – ₹1,800), which they will pay to the government via the GST portal.
Ineligible Input Tax Credit
- 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 ITC?
- The dealer must have a valid tax invoice, debit note, or relevant GST documents.
- If the goods are received in batches, ITC is claimable only after receiving the final lot.
- The taxpayer must file a GST return regularly. It ensures accurate reporting of sales and purchases.
- If the buyer does not pay the supplier within 180 days from the invoice date, ITC under GST cannot be claimed.
- ITC is not allowed if depreciation has been claimed on the tax component of capital goods.
- Certain goods and services, such as motor vehicles, food, beverages, and beauty services, are restricted from ITC claims in GST.
What Can Be Claimed as Input Tax Credit (ITC)?
A few common items that businesses usually claim as ITC are:
- Cleaning services for maintaining business premises.
- Rent for office space or storage.
- Internet and communication costs.
- Bank fees for financial transactions.
- Repairs and maintenance of machinery.
- Advertising costs for promoting business services.
- Legal and conslting fees for professional services.
- Conferences and training costs.
What Cannot Claimed as Input Tax Credit (ITC)?
- Motor vehicles and conveyances.
- Insurance, repairs, and maintenance for motor vehicles.
- Health and life insurance, rent-a-cab services.
- Membership fees.
- Works contract services for the construction of immovable property.
- Employee travel benefits (LTA, vacation benefits).
- Goods used for personal consumption.
- Goods lost, destroyed, or stolen.
- Goods and services under the composition scheme.
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
FAQs
Who is eligible to claim Input Tax Credit (ITC)?
- The person must be a GST-registered taxpayer.
- The goods or services purchased must be used for business purposes.
- The invoice must be valid and meet the compliance requirements.
- The supplier must have filed GST returns, and the taxes paid must reflect in the GST portal (GSTR-2A/2B).
- The goods or services must not be exempt under GST laws.
What types of taxes can be claimed as ITC?
- CGST (Central Goods and Services Tax)
- SGST (State Goods and Services Tax)
- IGST (Integrated Goods and Services Tax)
- UTGST (Union Territory Goods and Services Tax)
- Taxes paid on goods, services, and capital goods used in business operations.
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
Most read resources
tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | GST Search Taxpayer | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | aaple sarkar portal | epf activation | scrap business | brsr | depreciation on computer | west bengal land registration | traces portal | Directorate general of GST Intelligence | form 16 | rtps | patta chitta