What is Input Tax Credit under GST

Input tax credit (ITC) is one of the key features of the Goods and Services Tax (GST) regime. It aims to eliminate the cascading effect of taxes and reduce the cost of doing business.

What is input tax credit?

Input tax credit means the GST paid by a registered person on the purchase of goods or services that are used for the furtherance of business. The input tax credit can be used to offset the GST liability on the supply of goods or services by the registered person.

For example, you are a manufacturer and you buy raw materials worth Rs. 10,000 and pay GST of Rs. 1,800 (18%), you can claim an input tax credit of Rs. 1,800. If the finished goods are worth Rs. 15,000 and collects GST of Rs. 2,700 (18%), you can use the input tax credit of Rs. 1,800 to pay only Rs. 900 as GST.

Eligible and ineligible input tax credit

Not all input tax credits are eligible for claim under GST. Some input tax credits are specifically blocked or restricted by the GST law.

Here are some examples of ineligible input tax credits:

• GST paid on motor vehicles and other conveyances. Except when used for specified purposes such as transportation of goods, passengers, or for imparting training.
• GST paid on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery. Except when used for making an outward taxable supply of the same category or as a part of a mixed or composite supply.
• GST paid on membership fees for a club, health, and fitness centre.
• GST paid on travel benefits extended to employees on vacation such as leave or home travel concession.
• GST paid on goods or services received by a non-resident taxable person, except for those on which interstate goods and Service tax (IGST) is payable.
• GST paid on goods or services used for personal consumption by the registered person or their employees.
• GST paid on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Who can claim input tax credit under GST?

Any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business subject to certain conditions as under.

1. Possession of tax invoice: The registered person must possess a valid tax invoice or any other specified tax-paying document to claim the credit.
2. Receipt of goods or services: The credit can be availed only after the registered person has received the goods or services, including scenarios where the billing and shipping addresses differ.
3. Actual payment of tax: The tax amount must have been paid by the supplier for the credit to be eligible for the recipient.
4. Furnishing of return: The registered person should have furnished the necessary return to claim the input tax credit.
5. Lot-based eligibility: If the inputs are received in lots, the credit can be claimed only when the final lot of inputs is received.
6. Timely payment to supplier: The recipient must pay the supplier the value of goods or services along with the tax within 180 days from the invoice date. Failure to do so will add the credit amount to the recipient's output tax liability with interest. However, once payment is made, the recipient can claim the credit again. In cases of part payment, proportionate credit will be allowed.

Time limit to claim input tax credit under GST

The time limit to claim input tax credit under GST is earlier of the following two dates:

• The due date of filing the annual return for that financial year; or
• The date of filing the monthly return for September of the next financial year.

For example, if a registered person wants to claim input tax credit for the financial year 2022-23. They must do so before filing the monthly return for September 2023 or filing the annual return for 2022-23, whichever is earlier.

How to claim input tax credit under GST?

To claim input tax credit under GST, you must follow these steps:

1. File monthly return in form GSTR-3B and declare your output tax liability and input tax credit details.
2. Verify the input tax credit details in form GSTR-2B, which is an auto-drafted statement based on the returns filed by your suppliers.
3. Reconcile any discrepancies between the claimed input tax credit and form GSTR-2B and rectify them in the next month’s return.
4. Ensure that you pay any excess input tax credit claimed along with interest and penalty if applicable.

Input tax credit helps in reducing the tax burden on businesses and ensures a seamless flow of credit in the GST system. By following the rules and procedures for claiming input tax credit, you can avail the benefits of GST and improve your cash flow and profitability.