Input Tax Credit (ITC)

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

GST Registration: The individual or entity must be registered under GST.
Business Use: The goods or services acquired should be used for business purposes, as per Section 16(1) of the GST Act.
Possession of Invoice: Following Section 16 (2) (a), the taxpayer must possess a valid invoice or tax-paying document that contains all necessary details.
Receipt of Goods/Services: The goods or services for which input tax credit is claimed must have been received, aligning with Section 16(2)(b).
Tax Payment by Vendor: The vendor who charged the tax must have paid this tax to the government.
Vendor Compliance: To ensure compliance, the vendor from whom the tax was collected must have filed the necessary returns, particularly GSTR-2B.

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?

Lost ITC Claims: The government might not approve the tax credit you’re supposed to get.
Risk of Notices: You might get notices for claiming more tax credits than allowed.
Payments to Bad Suppliers: You could end up paying suppliers who don’t need to follow the tax rules correctly.
Losing Client Trust: Mistakes in tax filings can make clients lose trust in you.
Extra Costs: Claiming too much tax credit can lead to paying interest.

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.