Input Tax Credit
What is ITC?
The GST taxation structure allows businesses across India to claim input credit for the tax they paid while purchasing capital goods for their company. This also includes tax paid on input goods/services, tax paid on reverse charge basis, and IGST paid on imports. Using these credits, business owners can reduce or pay off their tax liabilities.
What are the prerequisites to claim ITC?
- The buyer must possess a valid tax invoice, debit note, or other necessary document issued by a registered dealer.
- The buyer must have received the good or service. The supplier must have paid the tax due on the buyer’s purchases to the government, either in cash or by claiming input tax credit. The supplier must have filed GST returns.
Can GST paid on a reverse charge basis be considered input tax?
Yes, tax paid on a reverse charge basis is considered as input tax.
Can SGST credit be applied toward IGST liability in another state?
Yes, SGST credit can be used for the payment of IGST liability, as long it’s done under the same GSTIN.
Can I use the CGST credit of one state to pay CGST for another state?
No, CGST and SGST credit for a state can only be used toward CGST and SGST liabilities within the same state and under the same GSTIN.
What if I claim ITC but don’t pay the consideration?
If you haven’t paid the consideration by 180 days from the date of the tax invoice, the ITC you claimed will be added to your output tax liability and you will have to pay interest. But you can still claim ITC on the payment of consideration and the tax involved.
Is there a time limit for claiming ITC?
Yes, ITC can only be claimed for tax invoices and debit notes which are less than a year old. The last date to claim ITC is the earlier of the following:
- Before filing your September GST returns following the end of the financial year applicable to that invoice. For example, for an invoice issued on June 26, 2018, ITC should be claimed by August 2018.
- Before filing the relevant annual return.
How do I claim credits from interstate purchases if I sell only in my home state?
IGST credits will be available to you, since you pay IGST while making interstate purchases. If you sell only in your home state, you will be able to use these IGST credits to offset your CGST liabilities first, and then offset your SGST liabilities with any remaining credits.
How can I claim credits for imports of goods from overseas?
Under GST, the integrated tax paid at the time of import will be available to you in the form of input tax credits. These credits can be used for paying your tax liability.
What happens when I have excess credits?
Unutilised or excess credits can be claimed as refunds, or carried over to the next tax period to offset your tax liability. If you choose to claim a refund, you are required to fill out an application online within two years from the relevant date, using Form GST RFD-01.
Eligibility to claim ITC based on ownership
Can I claim ITC on all the taxable goods and services that I purchase?
ITC can be claimed on the taxable goods and services that you purchase as long as they are used for business purposes only. There are a few items exempted from this, including items used for personal consumption, inputs used for manufacturing immovable property (except plant and machinery), pipelines, telecommunication towers, and taxes paid as penalty for evading taxes.
Can a compounding vendor claim ITC?
No, compounding vendors (business owners who have registered their firm under the composition scheme) cannot claim ITC.
Can I avail ITC if I purchased goods from an unregistered supplier?
If you buy goods from an unregistered supplier, you must pay tax under the reverse charge mechanism. You can claim input credit for the tax paid.
If I purchase goods from a registered dealer and sell them to an unregistered person, can I claim ITC on the supplies?
Yes, you can claim ITC once the supplier files their GSTR-1. You should furnish details regarding the sales transaction in your GSTR-1.
If I order goods to be delivered to another person, who can claim ITC?
ITC should be claimed by the person who ordered the goods.
Can I claim ITC without completing the payment of consideration for the goods/services supplied?
Yes, you can claim ITC. However, you must complete the payment of consideration, along with tax, within 180 days from the date of issue of the tax invoice.
Note: This timeframe does not apply if the tax was paid under the reverse charge mechanism.
Eligibility to claim ITC based on the type of supply
My firm specialises in manufacturing exempted goods. Can I claim ITC on the capital goods purchased for manufacture?
No, ITC cannot be claimed on capital goods purchased for the purpose of manufacturing exempted goods. Input tax credit can only be claimed on the goods used for manufacturing taxable supplies.
If I purchase goods that are delivered in instalments, can I claim ITC?
Yes, you can claim ITC once you’ve received the last instalment.
If I buy a motor vehicle to use for my business, can I claim ITC on the purchase?
It depends on how the vehicle will be used in your business. If your business provides transportation services, the vehicle is considered a capital good. For instance, if you own a driving school and you buy a vehicle for providing driving lessons, you can claim ITC on the vehicle. If your business is not providing a transportation service, the vehicle is not considered a capital good for your business. For instance, if you own an advertising firm and you want to transport your employees to clients’ offices, you cannot claim ITC on the vehicle.
Can ITC be claimed on lost or stolen goods?
No, ITC cannot be claimed on lost or stolen goods. Also, ITC cannot be claimed on goods written off as gifts or free samples.
Can I claim ITC on the goods and services involved in the construction of a building that is to be used for business purposes?
No, you cannot claim ITC on the goods and services used for the construction of immovable property (except plant and machinery). Plant and machinery used in construction includes:
- machinery fixed to earth by a foundation or structural support
- Note: Plant and machinery construction does not include land and buildings.
Can ITC be claimed on zero-rated supplies?
Yes, zero-rated supplies are considered taxable supplies for the purpose of availing ITC.
Claiming ITC based on various registration scenarios
If I’m newly registered under the GST regime, am I entitled to ITC?
Yes, you can claim ITC on the inputs, semi-finished goods, and finished goods held in stock on the day immediately before the day of registration. For example, if the registration is granted on August 2, 2017, ITC can be claimed on the stock held as of August 1, 2017.
If my turnover exceeds the prescribed limit, and my business is liable for registration under GST, can I claim ITC on the goods held as stock?
Yes, if you apply for registration within 30 days of becoming liable, you can claim ITC on the input, semi-finished goods, and finished goods held in stock on the day immediately before the day on which you became liable for registration. For example, if you become liable to pay tax on August 1, 2017 and obtain your registration on August 15, 2017, you can claim ITC on stock you held as of July 31, 2017.
Can I claim ITC if I have opted for voluntary registration? What if I am a compounding vendor and I migrate to the normal tax scheme?
Yes, you can claim ITC on inputs, semi-finished goods, and finished goods held in stock on the day immediately before the date of registration. The same rule applies to compounding vendors who migrate to the normal tax scheme.
What happens to ITC when a business owner opts for composition scheme or when their goods/services become exempt?
The business owner will have to pay an amount equal to the ITC of the stock held on the day immediately before the change occurs. For example, if a person opts for the composition scheme on August 1, 2017, they will have to pay an amount equal to the ITC on the stock they held as of July 31, 2017.
Reconciliation during filing of tax returns
What happens if the details of purchases declared by the recipient do not match the purchase details declared by the supplier in their tax return?
Initially, both parties will be notified regarding the mismatch. If the mismatch is not rectified, the amount will be added to the recipient’s output liability in the following month. For example, if the mismatch was communicated in August, the amount will be added in September.
Can ITC be claimed only after matching?
No, ITC is allowed provisionally for 2 months. The supplier and the recipient will be notified about any existing discrepancy. If the mismatch is not rectified, the ITC will be reversed automatically.
Can provisionally permitted ITC be used for payment of all liabilities?
No, provisionally permitted ITC can be used only for the payment of self-assessed output tax in the tax return.