ITC E-Book

ITC E-Book

Input Tax CreditIntroduction

Understanding Input Tax Credit - Tax Perspective

1. Input Tax Credit

2. Definitions

3. Ineligible Credits

4. Conditions for Claiming Input Tax Credit

5. Proportionate Credit

6. Other Relevant Points

ITC on Stock - Transition Provision

Conditions to be Fulfilled to Take Credit of Eligible Duties or Taxes

How Will Input Tax Credit Be Adjusted?

Process of Claiming Input Tax Credit

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Introduction

Input Tax Credit (ITC) is the credit for tax paid on inputs. Every dealer is liable for output tax on the taxable sale effected

by him. The basic principle of GST is that every business pays tax only on the value addition done by them. ITC is the

mechanism by which the business sets off their output tax against the input tax.

So, it becomes important to understand the list of items on which one can can claim the ITC and the consequences of ITC

that has been wrongly claimed. Also, how the mechanism for the same can be automated.

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Understanding Input Tax Credit - Tax Perspective

Let’s assume that you are the owner of ABC

Garments. Now, you have purchased the goods

(garments) for selling, on which you pay the

freight for delivery. You also purchase a laptop

for recording all your business transactions, and

make the payments for all these transactions

along with the tax (GST) to your vendor.

1. Input Tax Credit

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So, for you, the purchase of garments is an input as you are using the same for the purpose of your business.

The purchase of a laptop falls under ‘Capital Goods’ as the same will be capitalized in your books of accounts and the

payment for freight services is considered as ‘Input Services’ as the same is used for the furtherance of business.

Let’s look at the definition of the same:

2. Definitions

Input: Any goods other than capital goods used or intended to be used by a supplier in the course of, or for the

furtherance of business.

Capital Goods: Goods, the value of which is capitalised in the books of account of theperson claiming the ITC and which

are used or intended to be used in the course or furtherance of business.

Input Services: Any service used or intended to be used by a supplier in the course or furtherance of business.

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Input Tax: Input Tax in relation to a registered person, means the Central Tax, State Tax, Integrated Tax or Union Territory

Tax charged on any supply of goods or services or both made to him and includes —

a. the integrated goods and services tax charged on import of goods;

b. the tax payable under RCM in certain supplies of goods/services and also when registered dealer purchases more than

Rs. 5,000 in a day from an unregistered dealer

Input tax comprises: all taxes paid – IGST, CGST,UGST and SGST - on forward charge or reverse charge basis including

imports of goods and/or services excluding taxes paid on composition basis. Provision is silent on tax paid by e-commerce

operator.

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Input Tax Credit: Means credit of ‘Input Tax’.

Reverse Charge: Means the liability to pay tax by the recipient of goods or services instead of the supplier of such goods

or services.

Output Tax: In relation to a taxable person, this refers to the tax chargeable under this Act on taxable supply of goods or

services or both made by a person or by his agent but excludes tax payable by him on reverse charge basis.

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3. Ineligible Credits

There are some inputs/input

services/capital goods on

which the input credit is not

allowed even if the same is

used for the purpose of, or

furtherance of the business.

They are as follows:

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• Transportation of passengers

• Transportation of goods

• Imparting training or motor driving skills

• Further supply of such vehicle or conveyance.

i. Motor vehicles and other conveyances, except when they are supplied in the usual course of business or are used for

providing taxable services of:

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• Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where

such inward supply of goods or services is used by a registered taxable person for making an outward taxable supply

of the same category of goods or services;

• Membership of a club, health and fitness centre,

• Rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for

an employer to provide to its employees under any law for the time being in force or such inward supply of goods or

services or both of a particular category is used by a registered person for making an outward taxable supply of the

same category of goods or services or both or as part of a taxable composite or mixed supply;

• Travel benefits extended to employees on vacation such as leave or home travel concession.

ii. Goods and/or services provided in relation to:

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iii. Works contract services when supplied for construction of immovable property, other than plant and machinery,

except where it is an input service for further supply of works contract service;

iv. Goods or services received by a taxable person for construction of an immovable property on his own account, other

than plant and machinery, even when used in course or furtherance of business;

v. Goods and/or services on which composition tax has been paid (u/s 9)

vi. Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods

under the provisions of the Income Tax Act, 1961

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4. Conditions for Claiming Input Tax Credit

A taxpayer can claim the Input Tax Credit only if they fulfill all the conditions mentioned below:

1. Taxpayer must be in possession of a tax invoice, debit note or such other taxpaying document as may be prescribed.

2. Taxpayer has received the goods and/or services. The goods are deemed to be received by the taxable person when

goods are delivered by supplier to recipient or other person on direction of the registered person whether an agent or

otherwise before or during movement of goods by way of transfer of documents of title of goods or otherwise.

3. Tax charged for such supply is actually paid to the credit of the appropriate Government, either through cash or

through utilisation of input tax credit admissible in respect of such supply.

4. Taxpayer has furnished GST returns.

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5. Proportionate Credit

i. The goods and/or services are used by a registered taxable person partly for business and partly for non-business; he

is eligible to input tax credit of goods and/or services attributable to the purposes of business.

ii. The goods and/or services are used partly for effecting taxable supplies (plus zero rated supplies) and partly for

effecting exempt supplies then he will be eligible for credit attributable to the taxable supplies including zero-rated

supplies only.

For this purpose, exempted supply shall include supplies on which the recipient is liable to pay tax on reverse charge

basis.

iii. A banking company or a financial institution including a non-banking financial company, engaged in supplying

services by way of accepting deposits, extending loans or advances shall have the option to either comply with the

the above provision or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs,

capital goods and input services in that month.

Explanation.- The option once exercised shall not be withdrawn during the remaining part of the financial year.

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6. Other Relevant Points

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1. Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is pay-

able on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of

one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit

availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be

prescribed.

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the

amount towards the value of supply of goods or services or both along with tax payable thereon.

2. Where the registered taxable person has claimed depreciation as per Income Tax Act on cost of capital goods, ITC

shall be denied.

3. Where the goods are received in installment or lots, ITC shall be available at the time receiving of final installment or

lot.

4. Input Tax Credit for pipe line and telephone tower fixed to earth by foundation and structural support shall be avail-

able as follows:

• 1/3 in the first year when goods received

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• 1/3 in the next year

• the balance in subsequent financial year

5. ITC shall not be allowed after filing of the GST return (GSTR-3) for the month of September following the end of fi-

nancial year to which the invoice relates or furnishing of the annual return whichever is earlier.

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ITC on Stock - Transition Provision

Under GST, input tax credit of eligible duties and taxes held in stock and input w.r.t. semi-finished goods and finished goods

will be available to eligible taxpayers on the fulfilment of certain conditions as discussed.

Following are the categories of registered taxable person entitled to take credit of inputs subject to certain conditions:

1. Being not liable to be registered under current law, dealing in exempted goods or services

2. Providing works contract service or availing benefit of exemption notification for services

3. First stage dealer or second stage dealer, registered importer

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1. Being not liable to be registered under current law

Under Central Excise Law every manufacturer whose first aggregate turnover does not exceed Rs 1.5 crores is not required

to be registered or discharge the liability to pay taxes. Similarly, under VAT Act, a taxpayer is not required to be registered

in case the turnover does not exceed the prescribed limit in a financial year which differs state to state.

Under GST a taxpayer is liable to register in case aggregate turnover in a financial year exceeds Rs 20 lakhs or Rs 10 lakhs

for the Special Category States. Hence, here persons who were not required to be registered will not be liable for same on

transition to GST which will lead to discharge of duties and taxes under GST.

2. Providing works contract service or availing benefit of exemption notification for services or dealing in exempted goods or services

In case a person is engaged in providing services which are exempted due to an exemption notification or dealing supply

of goods on which tax is not levied, is not liable to pay duties. However, under GST the person who was not required to pay

taxes or duties earlier will be liable to discharge the same.

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3. First stage dealer or second stage dealer, registered importer

Under Central Excise Law every First stage dealer or

second stage dealer is required to be registered as a

dealer and the not eligible to take credit of excise duty

paid. The excise duty involved is allowed as a credit to

the registered manufacturer of dutiable goods. Similarly,

an importer of goods is required to be registered and

discharge import duties.

The categories of registered taxable person mentioned

above will be entitled to take credit of inputs.

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Conditions to be Fulfilled to Take Credit of Eligible Duties or Taxes

• The goods used for making taxable supplies

• Under the current tax regime, input tax credit is not allowed which leads to increased prices of goods or services. Un-

der GST, the credit of such input taxes or duties will be allowed will lead to decreased prices of such goods or services.

This benefit must be passed to the recipients of such goods or services through reduced prices

• The taxable person must be eligible for such input tax credit under GST

• Taxable person must be in possession of invoice and/ or other documents evidencing payment of duty under current

law

• The date of invoice and/ or other documents must be issued is within 12 months from the date of transition to GST i.e.

appointed date

• The supplier of services is not eligible for any abatement under GST. In the case where the registered taxable person is

not in possession of invoice and/ or other documents evidencing payment of duty under the current law, the credit of

input tax will be allowed subject to such limitations, conditions and safeguard as may be prescribed by the law

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How Will Input Tax Credit Be Adjusted?

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Process of Claiming Input Tax Credit

IGST Input Tax Credit: First against

IGST then balance against CGST

and SGST

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Process of Claiming Input Tax Credit (Contd.)

CGST: CGST ITC availed against CGST but cannot be used to pay SGST liability

SGST: SGST ITC availed against SGST but cannot be used to pay CGST liability

CGST & SGST ITC Can be used to pay IGST

For more details on GST, please visit cleartax.com/gst