Input Tax Credit (ITC): The Backbone of GST

ITC - Input Tax Credit

When we buy goods and services, we pay tax on them. Imagine yourself to be a businessman. You pay tax on the goods you purchased. When you resell them, you will also collect tax for depositing them to the government. And this cycle goes on and on. What do you think will happen to the price of the good? It will skyrocket due to excessive taxation. But that is not the case today. Thanks to the concept of Input Tax Credit (ITC).

Want to know about this miraculous concept? Here you go.

Table of Contents

  1. What is Input Tax Credit?
  2. Why Input Tax Credit Introduced?
  3. Conditions for claiming ITC
  4. Reversal of Input Tax Credit
  5. How to Claim ITC?
  6. Final Thoughts
  7. Frequently Asked Questions

What is Input Tax Credit?

As the name suggests, Input Tax Credit is the tax credit you can avail while paying GST. It means that the GST paid while purchasing the inputs can be adjusted while depositing GST. Let’s understand it with an example.

Suppose you have paid GST of Rs 100 while buying raw materials of Rs 800. Then, you produce the final product and sell it for Rs 1000. Assuming the rate to be 18%, you have to deposit GST of Rs 180. But here’s a catch. You have to deposit just Rs 80 (180-100), as you have already paid GST while purchasing raw materials.

Why Input Tax Credit Introduced?

You may wonder why the government introduced the concept of Input Tax Credit when it could have earned extra revenue without it.

It is pretty simple. The government did so to ensure public welfare. How? Without ITC, you would charge a higher price, as the input cost includes GST paid on inputs. Due to ITC, you can get a credit of Rs 100. So, you won’t consider it as your cost of production.

This way, you can sell your products at lower prices. It makes the product affordable to more people. Thus, it leads to public welfare. See how generous the government is. It sacrificed its tax revenue for the sake of the people.

Conditions for claiming ITC

As you can see above, an input tax credit reduces the tax revenue of the government. So, the government won’t let you off the hook easily. It has placed some conditions that you will have to fulfil to claim ITC:

  • Only a person registered under GST can claim the input tax credit. After all, unregistered business owners don’t collect GST in the first place. Availing ITC is a distant dream for them.
  • You can claim ITC only for business transactions. If you have bought goods for personal purposes, you are no more than an ordinary customer.
  • The businessman should have proof of the purchase transaction. In this case, you should have a tax invoice for the purchase of inputs. How can you expect the government to believe you if you don’t even have a tax invoice?
  • You should have received the goods: Merely having a tax invoice won’t solve your problem. You should also receive the goods. What if you claimed ITC and returned the goods afterward? It will create a big mess.
  • Both the parties should file the return: Both the buyer and the seller have to file GSTR-3B and GSTR-1. Without you filing these returns, it wouldn’t be possible for the government to track the movement of goods.

Here’s a fun fact. You can claim input tax credit only if the seller has deposited the tax. It means that you have to force the seller to file the return and pay tax on time if you want to avail of ITC.

Our government is a bit savage. It created tensions between the parties and enjoyed the view from the top.  

Special Points

  • In the case of a capital good, you can either claim ITC or write off the tax paid over the asset’s useful life through depreciation. Our government is not that benevolent to allow both ITC and extra depreciation at the same time.
  • If you receive the goods in installments, you can claim ITC on receipt of the last installment.

Note: A businessperson registered under the composition scheme of GST cannot claim ITC. It is so because he pays tax at concessional rates. Letting him avail ITC can even make the total tax liability less than zero. That would make no sense.

Reversal of Input Tax Credit

No doubt, the conditions to claim ITC is cumbersome. But it doesn’t mean that your life will be a bed of roses after you have claimed ITC. It can also get reversed, i.e., you have to pay the ITC previously availed.

It happens in any of the following cases:

  • Using goods for personal purposes: Did you think you can avail ITC on goods by showing them for business use? Well, it is not. If you have done so, you have to pay the ITC you availed previously. You may also have to pay the prescribed penalty for deceiving CBIC.
  • Making exempt supplies: In GST, the sale of essential commodities is exempt from GST. It is to avoid increasing the price of necessities.

But there is one flaw here. The supplier can’t claim ITC. So, he will include the tax paid in the cost as well. And charge the price accordingly. It defeats the entire purpose of making the sale exempt from tax.

  • Non-payment of invoices within 180 days: You could avail of ITC only after the seller has deposited the tax. But it doesn’t mean that you can delay his payment forever. He has a right to receive timely payments as well. And even the government recognizes it.

That is why this rule got implemented. Either pay the supplier within 180 days. Else, you will be ineligible for ITC.

  • Transactions of Blocked Credit: There are some transactions where ITC is blocked. It means that you can’t avail of ITC if you perform any of these services. If you have availed of ITC previously, you have to reverse it.

How to Claim ITC?

All of the above would have helped in knowing about Input Tax Credit. But what is the point if you don’t even know the way to claim ITC? Don’t worry. You will get your answer here.

You have to mention the details in GSTR-3B. It contains the following particulars.

As mentioned above, you can claim ITC only if the seller has filed the return and deposited the tax. But we are quite the forgetful breed. So, some sellers may forget to do the same.

That is why the government allows provisional credit of 5% of the eligible ITC (as per the latest update). For example, if the GST return shows an ITC of Rs 100, you can claim an ITC of Rs 105 if some suppliers have not provided the details.

Final Thoughts

Due to the importance of Input Tax Credit, you can call it the backbone of GST. So, it is essential to have all the necessary documents, especially the GST-compliant invoices. There are some situations where you can’t claim ITC. Even the ITC previously claimed by you may get reversed in exceptional circumstances.

In the end, keep in mind all of them. Else, all of your GST paid will go down the drain.

Frequently Asked Questions

Q1: How do you calculate ITC?

In simple words, ITC is the difference between the tax payable on the sale of goods and the tax already paid on the purchase of inputs.

Q2: What happens if I am not able to utilize the entire ITC?

The balance input tax credit will be carried forward to the next month till you avail it. If you couldn’t claim it till the end of the prescribed period, you can claim a refund of GST.

Q3: How do I know my Input Tax Credit?

To know about the available ITC, log in to the GST E-Filing portal. You will find the relevant details in the Electronic Credit Ledger.

Q4: What is the time limit for claiming ITC?

You can claim input tax credit within 180 days from the date of invoice issued by the supplier.

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About the Author: Prasuk Jain

I am an inquisitive and tenacious person with a mix of enthusiasm and a positive attitude, currently pursuing CA.