What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) is the heart and soul of GST. It is because it protects the interest of the manufacturers by providing them tax deductions, which they have already paid to the seller of raw material.

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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.

Description Amount (In INR)
Total GST Payable 36,000
Less (-) GST already paid on purchase of raw material 18,000
Net Payable GST 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)

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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.

FAQ's

  • What are the factors one should know to understand provisions of the input tax credit?

    • The ITC is available to avoid the cascading effect of taxes. It is based on the principle of VAT (Value Added Tax), which allows the taxpayer to avail of tax credits he puts on input. 
    • The output supplier avails of credit for UTGST, IGST, and CGST charged by the input supplier. 
    • It is the primary condition for availing of ITC that the goods and services supplied must be utilized for the furtherance of business. 
    • The registered person must file the return within the stipulated time.
  • What goods and services are not eligible for input tax credit?

    The following goods and services do not apply to ITC:
    Motor vehicle
    • I the vehicle is more than the seating capacity of 13 persons, including the driver, ITC will be applicable. 
    • If it is a transport for passengers and goods, ITC shall be applicable. 
    • Furthermore, such vehicles are further supplied to be sold. 
    Services
    Services of repair, insurance, maintenance and servicing of a motor vehicle.
    Food and Beverages
    However, if they are taken for delivery to the consumer, then ITC shall be applicable.
    Membership
    ITC shall not apply in case of membership of a fitness club, health club or any other club.
  • What is input tax credit meaning?

    Input tax credit meaning is easy to understand. The GST allows a taxpayer to avail of ITC at the time of paying tax. They can deduct the amount of tax paid already at the time of buying raw materials for such goods. Hence, he is only liable to pay the remaining tax to the government. However, the taxpayer must be registered under GST and must carry the invoice issued by the supplier of raw material.
  • What is input and output tax credit?

    When the taxpayer pays GST on purchasing goods or raw materials, it is known as input tax. However, when the goods are sold by the trader and GST is collected thereupon, it is known as an output tax credit. 
    During the payment of GST to the government of India, the trader deducted the input tax, which he had already paid at the time of buying raw material, from the output tax that he collected from the consumer.
  • Where is the condition of the input tax credit defined?

    The condition of the input tax credit is defined under section 16 of The Central Goods and Services Act of 1961. The act states the requirements and eligibility criteria to avail of ITC. It consists of four clauses and several explanations and sub-clauses to specify the conditions of an input tax credit.
  • What documents are required to avail of input tax credit?

    The registered taxpayer must possess the following documents to claim ITC:

    Invoice

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

    Debit Note

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

    Other Documents

    • Bill of entry as specified under Customs Act.
    • Revised invoice
    • Documents issued by ISD (Input Service Distributor)

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