What is Input Tax Credit (ITC)?

Let us learn about the Input Tax Credit (ITC) in detail.

What is ITC in GST?

A taxpayer can deduct his tax liability at the time of paying output tax upon the supply of goods and services. In other words, the taxpayer can deduct the amount of tax which he has already spent on the purchase of goods. However, the remaining amount must also be paid to the tax authority or government of India. 

Illustration of Input Tax Credit:

A business person dealing in electronic items purchases raw materials to produce tube lights. It costs him INR 1,00,000 along with 18% of GST. Hence, he paid a total of INR 1,18,000 upon purchasing raw materials. 

Later, the company produced tube lights which sold for INR 2,00,000 along with 18% GST collected from the consumer. Hence, the company generated total revenue of INR 2,36,000, including tax collected from GST.

While paying taxes, the taxpayer is entitled to deduct the tax amount (INR 18,000) he has already paid to the manufacturer when buying raw materials. Hence, instead of paying INR 36,000, the assessee is only liable to pay INR 18,000.

GST Input Tax Credit

Under the GST regime, a taxpayer is entitled to avail of the benefits of ITC on every input if:

• He is a registered taxable person under GST

• He intends to utilize the goods to further his business

A taxpayer or business person can also avail of the input tax credit benefits in using capital goods during the course or operation of the company.

Eligibility for Taking Input Tax Credit

The eligibility criteria and conditions for taking input tax credit are stated under section 16 of The Central Goods and Services Tax Act, 2017. 

Section 16(1) of the same act states that a registered taxpayer shall be eligible to avail of input tax credit incurred on the goods and services supplied to him. However, the registered person must be subject to the condition and restrictions specified under section 49 of The Central Goods and Services Tax Act of 2017. 

The goods and services are intended to be utilized in the furtherance or course of business. Furthermore, it shall be credited via an electronic credit ledger.

Nevertheless, section 16(2) states that no registered taxpayer shall be entitled to avail of input tax credit in respect of the goods and services served to him unless:

• He possesses the debit note or tax invoice issued by the supplier of goods and services. However, other documents are also eligible to be produced. It is provided that the supplier of G&S must be registered under this act. 

• He has received the G&S from the supplier. 

However, the taxpayer is not mandatorily required to receive the goods and services personally. 

• It is stated in explanation 1 of clause 2 of section 16 that the agent can obtain goods at the direction of the registered taxpayer. 

• Further explanation 2 of the same clause of the same section states that any other person may provide the goods and services on the order of the supplier. 

Section 16 (2) (c) states that the tax charged with respect to the supply of goods and services must actually be paid to the government. Subclause (d) of the same section declares that the registered taxpayer must furnish the return filed under section 39. 

Section 16 (3) states that the input tax credit shall not apply if the registered taxpayer claims depreciation on plant & machinery and cost of goods sold under section 43 of the Income Tax Act of 1961.

Document for Claiming ITC

The following documents must be kept handy by the registered taxpayer to claim the ITC:

1. Invoice

   The registered taxpayer must possess the invoice issued by the supplier of goods and services.

2. Debit Note

   A taxpayer may also possess the debit note issued by the supplier to claim input tax credit.

3. Other Documents

   • Bill of entry as specified under Customs Act

   • Revised invoice

   • Documents issued by ISD (Input Service Distributor)

Uses of ITC

• The ITC is only allowed for goods and services used for the furtherance of business.

• ITC is not applicable for the goods and services availed for personal use. 

• In the case of goods and services received partly for business and personal utilization, the ITC shall only be applied towards the business purpose.

Benefits of Input Tax Credit

The input tax credit avoids double taxation. It is the essence of GST. In addition, the ITC eliminates the cascading effects of taxes. 

For example, when a person buys raw materials to develop a product. He pays a specific tax upon purchasing the materials. It is known as input efforts on development. However, when he sells the product made of same raw material, the finished goods are known as the output. He claims the tax credit on the output, which he has already paid to the supplier or vendor. Hence, he is only liable to pay the balance tax liability.

Due Date for Taking ITC

A registered taxpayer must furnish his return under section 39 within the stipulated time to avail of an input tax credit. The return should be filed on 30th November or on the date of filing returns in the GSTR-9 form, whichever is earlier.

In Conclusion

ITC is an essential factor of GST. One may take the benefits of input tax credit by deducting the non-taxable amount he has already paid. It is also called a GST input tax credit. To calculate the GST payable, the taxpayer may take input and output tax credits into account and deduct the input from the output.

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