Input tax credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.
Here’s how:
When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.
For example- you are a manufacturer:
- Tax payable on output (final product) is Rs 450
- Tax paid on input (purchases) is Rs 300
- You can claim input credit of Rs 300 and deposit only Rs 150 in taxes
What is Input Tax Credit?
Input tax credit (ITC) is the tax paid by the buyer on purchase of goods or services.
Such tax which is paid at the purchase when reduced from liability payable on outward supplies is known as input tax credit.
In other words, input tax credit is tax reduced from output tax payable on account of sales.
GST Reconciliation
ITC Reconciliation is a process undertaken to ensure that a registered taxpayer is granted the correct amount of credit for their purchases. This involves comparing the information submitted by suppliers in their GSTR-1 forms with the purchase records maintained by the taxpayer. The supplier’s details from GSTR-1 are automatically reflected in the taxpayer’s GSTR-2A form, facilitating this comparison. To validate the accuracy of the data provided by the supplier in GSTR-1, all entries must be backed by legitimate documents such as invoices, debit notes, credit notes, and any necessary amendments. This step is crucial for confirming the authenticity of the transactions and the corresponding tax credit claims
Who can claim ITC?
ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as prescribed.
- The dealer should be in possession of tax invoice
- The said goods/services have been received
- Returns have been filed.
- The tax charged has been paid to the government by the supplier.
- When goods are received in installments ITC can be claimed only when the last lot is received.
- No ITC will be allowed if depreciation has been claimed on tax component of a capital good
What can be claimed as ITC?
- Personal us
- Exempt supplies
- Supplies for which ITC is specifically not available
Reversal of Input Tax Credit
ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed . Apart from these, there are certain other situations where ITC will be reversed.
ITC will be reversed in the following cases-
1) Non-payment of invoices in 180 days– ITC will be reversed for invoices which were not paid within 180 days of issue.
2) Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.
3) Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.
4) Capital goods partly for business and partly for exempted supplies or for personal use – This is similar to above except that it concerns capital goods.
5) ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.
Eligibility of ITC
Documents Required for Claiming ITC
- Invoice issued by the supplier of goods/services
- The debit note issued by the supplier to the recipient (if any)
- Bill of entry
- An invoice issued under certain circumstances like the bill of supply issued instead of tax invoice if the amount is less than Rs 200 or in situations where the reverse charge is applicable as per GST law.
- An invoice or credit note issued by the Input Service Distributor(ISD) as per the invoice rules under GST.
- A bill of supply issued by the supplier of goods and services or both.
Key Data to Reconcile for GST Compliance
| Data to be Reconciled | Purpose |
|---|---|
| Purchase Register and GSTR-2A | Verify the accuracy of inward supplies as declared by suppliers |
| Sales Register and GSTR-1 | Confirm the accuracy of outward supplies reported by your business |
| GSTR-3B and GSTR-1 | Match tax liability and ITC details for accurate tax reporting |
| GSTR-2B and GSTR-3B | Ensure correct utilisation of ITC based on auto-drafted data |
| Input Tax Credit (ITC) | Match claimed ITC in GSTR-3B with available ITC in GSTR-2A or GSTR-2B |
| E-way Bills and Invoices | Cross-verify data to reconcile taxable amounts and identify discrepancies |
| Annual Returns and Monthly/Quarterly Returns | Confirm consistency in data reported throughout the financial year |
| Supplier-wise GST Reconciliation | Reconcile data for each supplier separately to ensure accurate ITC claims |
What are the Consequences of not Conducting the ITC Reconciliation?
FAQs
Why is ITC Reconciliation important under GST?
It helps in identifying discrepancies between the ITC claimed and the ITC available, ensuring that taxpayers claim the correct amount of credit and comply with GST regulations.
Can I claim ITC if my supplier has not filed GSTR-1?
ITC can only be claimed if the supplier has filed GSTR-1 and the invoice details are reflected in your GSTR-2A/2B.