Input Tax Credit (ITC) is a kind of tax that businesses pay on a purchase. ITC can be used to reduce the tax liability when businesses make a sale. It means that businesses can be able to reduce their tax by claiming credit to the extent of ITC paid on purchases. In this article, we will discuss ITC and its structure under the GST laws.
# What is Input Tax Credit (ITC)?
Let’s understand ITC by an example: suppose you are a manufacturer, and the tax payable on a final product is Rs 500, and the tax payable on input is Rs 400. In that case, you can claim input credit of Rs 400, and you have to deposit only Rs 100 in taxes.
Now, we will discuss ITC in GST.
# Input Tax Credit (ITC) in GST
Under the GST Act, there is a mechanism for input tax credit for you, if you are registered under the GST. That means, if you are a businessman, supplier, manufacturer, e-commerce operator, or any other person registered under GST, you are qualified to claim input credit for tax paid by you during purchasing items.
# How to Claim ITC under GST?
If you are registered under the GST, and you want to claim ITC under it, you have to fulfil the following criteria:
- You must have a purchasing tax invoice or debit note issued by a registered dealer. In the case where products are received in installments, credit will be calculated against the tax invoice upon receipt of the last installment.
- You must have received the goods or services. Note that if you do not pay the value of goods or service within three months of issuing of invoice, and you avail the input credit based on the invoice, that credit will be added to your output tax liability along with interest.
- The tax that is charged on your purchases should be deposited to the GST authorities by the supplier in cash or through claiming input credit.
- Your goods or service supplier has filed GST returns. Probably this criteria to claim ITC under GST is the most path breaking tax reform in GST law. It clearly says that input credit is only allowed if your supplier has deposited the purchase tax he collected from you. Therefore, each input credit claimed by you will be matched and validated before you can claim it. So, all your suppliers must file GST tax in order to allow you to claim input credit on purchases.
- If the taxes on purchases are higher than on sales, then you can get unclaimed input credit. For that case, you can carry forward to claim a refund. In the case of output taxes being higher than input taxes, then you can pay the balance, and no interest is paid on input tax balance by the government.
- You cannot take the input tax credit on purchasing invoices which are more than one year old. The time period will be counted from the tax invoice date.
- You can claim the input credit tax on both goods and services as GST is charged on both goods and services except those items which are exempted from the GST list.
- You can also avail the input tax credit on capital goods including fixed assets such as buildings, machinery, equipment, vehicles, and tools.
- You cannot avail the input credit tax for goods or services that are used for personal use such as beauty treatment, health services, cosmetics, and plastic surgery related expenses.
- If the GST return is filed in September following the end of the financial year, in that case, no input tax credit will be allowed.
# Reconciliation of Input Tax Credit
In order to avail the input tax credit, there should be a complete match between the details provided by you and your supplier in their respective GST returns. If there is any mismatch between the two, you as a recipient and the supplier will be notified regarding discrepancies after filling of GSTR-3B. If there is still a mismatch, you cannot be allowed to avail the input tax credit.
# Documents Required for Input Tax Credit
For claiming ICT, you must have the following documents:
- Purchase invoice issued by the supplier.
- The debit not issued by the supplier.
- Entry bill of goods or services.
- Special bill of supply if the amount is less than Rs 200 or where the reverse charges are applicable according to GST laws.
- A credit note that is issued by the input service distributor.
- Supply Bill issued by the supplier for goods or services.
Finally, we have discussed everything about input tax credit and procedure to claim it under the GST law. ITC is an innovative way of increasing the taxpayers base in the country. At the same time, it is also beneficial for businesses as it can reduce their tax liability by claiming credit to the extent of GST paid on purchases.
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