Input Tax Credit

Last updated on 27 August, 2021

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With the rollout of GST in July, one of the most important concepts that every tax payer needs to understand is input tax credit(ITC). Before diving into details, let’s have a thorough understanding of input tax credit.

What is Input Tax Credit in GST?

GST taxation structure allows businesses across India to claim input credit for the tax they paid while purchasing capital goods for their company.

Latest updates
  • Starting January 2021, the provisional credit is restricted to 5 per cent.
  • According to Rule 86B under GST, if the value of taxable supply exceeds 50 lakhs in a month, then the registered taxpayer cannot use the available credit amount to discharge his output tax if it exceeds 99% of tax liability.
  • ITC will be auto populated from GSTR 1 through GSTR 2B. This will be effective for monthly filers from 1 January, 2020 and for quarterly filers from 1 April, 2020.
  • In order to enable auto population of tax liability and ITC, Form GSTR 1 has to be mandatorily filed before GSTR 3B.

How does it work?

At each stage of the supply chain, the buyer gets credit for the input tax paid, and they can use it to offset the GST that needs to be paid to the Centre and State governments. To understand this concept better, let’s take the example of a company called MK Kitchen Knives which sells custom-made kitchen knives. 

Thus, the tax that MK Kitchen Knives owes to the Government = Output tax - Input tax credit = Rs.500 - Rs.250 = Rs.250

GST Input Tax Credit Rules

Businesses need to adhere to the following rules to claim input tax credit. 

Ineligible to claim ITC

ITC cannot be claimed in the following cases:

Documents required for availing ITC 

The documents required to avail ITC are:

Time limits for claiming ITC under GST

ITC can only be claimed for tax invoices and debit notes which are less than a year old. In any other case, the last date to claim ITC is the earlier of the following:

Claiming and reconciling ITC under GST with example

The GST comprises of 3 types of taxes: CGST, SGST and IGST.

CGST (Central GST) - Collected by the Central Government for transactions within one state.

SGST (State GST) - Collected by the State Governments for transactions within one state.

IGST (Integrated GST) - Single levy collected by the Central Government for transactions between states.

The three tax credits can be used to offset one another.

Reconciliation of these credits is done by matching your transactions with those of your customers or vendors. This will help the Tax Department verify the transactions from both ends. The GST Identification Number (GSTIN) is used to match transactions together.

Let us now use an example to understand how this reconciliation process works:

Suppose MK Kitchen Knives (recipient) purchased 10 tons of steel from GH Steelware Inc. (supplier) which is also registered for GST. The two companies will reconcile their transactions, and the recipient will claim the input tax credit, as follows:

In cases where the tax on purchases is higher than the tax on sales, the extra input credit can be carried forward or claim a refund. Existing CENVAT) credits can be converted to GST input tax credits as well.

Adjusting ITC for inter-state and intra-state transactions

Let’s now look at how Input Tax Credit can be used to offset output tax liabilities for both inter-state and intra-state transactions.

Let’s say MK Kitchen Knives is based in Tamil Nadu. The details of their last four intra-state transactions are tabulated below, including the tax liability.

If there is any CGST credit left over after setting off the CGST tax liability, it cannot be used to offset SGST. Thus, the balance of the CGST credit will be carried over to the next tax period. The same applies to unused SGST credit; it can only be carried forward, not applied to CGST liability.

Consider another set of transactions for MK Kitchen Knives. This time, it’s a mix of inter-state and intra-state transactions.

Availing ITC

Here are a few specific cases in which ITC can be availed:

NOTE: In the last two cases, ITC should be availed within 1 year from the date of issue of invoice by the supplier.

ITC Utilization

As per Rule 88A from a notification released by the CBIC (Central Board of Indirect Taxes and Customs), taxpayers must first use the ITC available from integrated tax to pay off all of their applicable integrated tax. Any ITC remaining after this, can then be used towards paying CGST, SGST, and UGST. This rule is only applicable if the ITC availed from integrated tax is used completely, before the ITC availed from CGST, SGST, and UGST are used.

Here is how ITC was utilized before Rule 88A was implemented.

ITC Utilization before

Here is how ITC is utilized after the implementation of Rule 88A.

ITC Utilization after

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