Input Tax Credit

Know about Input Tax Credit (ITC), with an example.

Input Tax Credit ideally refers to the tax already paid by a person when purchasing goods and services and is available as a deduction from tax payable. E.g., a trader purchases goods worth Rs. 100 and pay a tax of 10% on them. And now this trader sold those goods at Rs. 150 and collected a tax of Rs. 15 from the buyer. Now the trader has to pay Rs. 15 to the Government as he had already paid Rs. 10, so Rs. 10 is called ITC of the trader and will be allowed as a deduction from tax payable, and he has to pay net Rs. 5 as GST.

Some of the technical aspects to be taken care of while availing of ITC?

A. Credit if ITC can be availed by any registered person 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.?

B. The pre-requisites for availing ITC by a registered person are:?

1. He has tax invoice or debit note issued by a supplier?
2. He has received the goods or services. “Bill to ship” scenarios are also included.?
3. Tax is paid by the supplier.?
4. He has furnished the return
5. If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received.?
6. He should pay the supplier, the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest. However, once the amount is paid, the recipient will be entitled to avail of the credit again. In case the part payment has been made, proportionate credit would be allowed.
7. If he has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September (Proposed to extend to November 30th? in Finance Bill 2022 which is yet to be passed) following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

F. ITC is not available in some cases as mentioned in section 17(5) of CGST Act, 2017. Some of them are as follows:

1. motor vehicles and other conveyances except under specified circumstances.?
2. input tax credit shall not be available on goods and/or services provided about:?
3. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting, or hiring of motor vehicles, vessels except under specified circumstances;?
4. Membership of a club, health and fitness center;
5. Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;?
6. Travel benefits extended to employees on vacation such as leave or home travel concession;?
7. Works contract services when supplied for construction of an immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;?
8. Goods or services received by a taxable person for construction of immovable property on his account, other than plant & machinery, even when used in the course or furtherance of business;?
9. Goods and/or services on which tax has been paid under composition scheme;?
10. Goods and/or services used for private or personal consumption, to the extent they are so consumed;?
11. Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.?
12. Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.

ITC in Special Cases

• Banks and Financial Institutions

Banks, financial institutions, and NBFC engaged in the business of deposits, extending loans or advances have an option to profit an amount equal to fifty percent of the eligible input tax credit on inputs. The choice, once exercised, cannot be changed during the financial year. Also, a restriction of 50% does not apply where the tax is paid on supply from one registered person to another registered person having the same Permanent Account Number.

• ITC in respect of Inputs Sent for Job Work

The principal (manufacturer) is allowed to take ITC of the inputs or capital goods sent to a job worker. ITC is permitted even if the inputs/capital goods are directly sent to a job worker for job-work without being first brought to his place of business. The inputs and capital goods need to be received within one/three years from the date of challan. Suppose such goods are not received back by the principal or supplied from the job worker's place within one year from the date of sending goods to the job worker. In that case, it shall be deemed that the inputs are sent directly to a job working on the day when the said inputs were sent out, the period of one year or three years shall be counted from the date of receipt of inputs by the job worker.

Reversal of Input Tax Credit in certain cases

1.?Payment is not made to the supplier within 180 days of the issue of the invoice.

2.?If input goods/services?are used for any purpose other than business or for supplying exempted supplies [Personal use]

3.?If capital goods?are used for any purpose other than business or for supplying exempted supplies

4.?A person transfers his?regular GST registration?into?Composite Scheme?or Cancels GST registration

5.?A person sells Capital goods or Plant and machinery

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