GST Input Tax Credit (ITC) Advisory
nput Tax Credit (ITC) is a mechanism under the Goods and Services Tax (GST) system that allows businesses
to reduce their tax liability by claiming credit for the taxes paid on inputs (goods and services) used in
the course of business. This helps in avoiding the cascading effect of taxes (tax on tax) and reduces the
overall tax burden on businesses.
1. Eligibility for ITC
Businesses can claim ITC only if the following conditions are met:
- Registered Taxpayer: The claimant must be a registered taxpayer under GST (unless exempted).
- Receipt of Goods and Services: The business must have received the goods and services for which ITC is being claimed.
- Payment of Tax to Supplier: The supplier must have paid the tax on the goods or services supplied to the business and filed the GST returns (GSTR-3B, GSTR-1).
- Proper Documentation: The business must have valid tax invoices or debit notes issued by the supplier.
- Use for Business Purpose: The goods or services must be used for business purposes, i.e., for further supply or in the course of business.
2. Documents Required for ITC
The following documents are necessary for claiming ITC:
- Tax Invoices: Proper tax invoices issued by suppliers, reflecting the GST charged.
- Debit/Credit Notes: If applicable, reflecting any adjustments for taxes.
- Bills of Entry: For imported goods.
- Challan: In case of receipt of goods from an unregistered person.
- GST Returns (GSTR-1 and GSTR-3B): Filed by the supplier, showing the tax paid.
3. Common Conditions for ITC Claim
To ensure a valid ITC claim, ensure compliance with these key conditions:
- Matching of Invoices: The ITC claim is subject to matching with the supplier's GST return (GSTR-1) and the buyer's return (GSTR-3B). If discrepancies are found, ITC may be denied or reversed.
- ITC Availability: ITC is only available for those goods and services used in taxable supplies. It cannot be claimed for non-business purposes, personal consumption, or exempted supplies.
- GST Returns Filing: To claim ITC, the taxpayer must file GST returns on time (GSTR-3B and GSTR-1), as the ITC claimed depends on the details disclosed in these returns.
- Time Limit: ITC must be claimed within a specific period:
- Within the due date for filing the return for the month of September following the end of the financial year.
- Alternatively, the due date for filing the annual return for that year.
4. Ineligible ITC
The following categories of purchases are ineligible for ITC:
- Goods/Services for Personal Use: ITC cannot be claimed for goods and services used for personal consumption.
- Motor Vehicles: ITC on motor vehicles is restricted unless they are used for business purposes like transporting goods, providing passenger transport, or renting.
- Food and Beverages: ITC on food and beverages (if not used for outward supply) is generally not allowed.
- Work Contracts: ITC is not available for construction of immovable property unless used for business purposes (e.g., commercial buildings).
- Entertainment, Club Membership, and Travel: ITC is restricted on expenses related to entertainment, membership of clubs, and travel for personal use.
- Non-Taxable Goods and Services: ITC cannot be claimed on supplies that are exempt from GST or supplies outside the GST scope.
5. Reversal of ITC
In some circumstances, ITC may need to be reversed, such as:
- Non-Payment to Supplier: If the supplier does not pay the tax within 180 days from the date of the invoice.
- Exempted Supplies: If the goods or services are used for exempted or non-taxable supplies.
- Change in Nature of Transaction: If a business transaction (purchase of goods/services) changes in nature, the ITC previously claimed may need to be reversed.
6. Documentation for ITC Reconciliation
Ensure that proper reconciliation of ITC is done regularly:
- Matching of GSTR-2B with GSTR-3B: Taxpayers must match the details in GSTR-2B with the ITC claimed in GSTR-3B to ensure that only eligible ITC is claimed.
- GSTR-9C and Audit: For taxpayers exceeding a certain turnover, reconciliation of ITC with financial records is required through GSTR-9C and statutory audit reports.
- Intra-State vs. Inter-State Supplies: Proper categorization of ITC for intra-state (CGST and SGST) and inter-state (IGST) transactions is necessary.
7. ITC on Capital Goods
ITC can be claimed on capital goods (such as machinery, equipment, etc.), but the following considerations must be made:
- Apportionment: ITC on capital goods must be claimed over a period, as the depreciation on capital goods is factored into the ITC calculation.
- Reversal on Sale of Capital Goods: If capital goods are sold or disposed of, ITC claimed on those goods needs to be reversed, based on the proportion of the remaining GST benefit.
8. Anti-Profiteering Compliance
Under GST, businesses are expected to pass on the benefit of ITC to consumers through reduced prices. Non-compliance could result in penalties for the business. The anti-profiteering provisions ensure that businesses do not benefit from the ITC by keeping prices artificially high.
9. GST Audit and Scrutiny
Tax authorities may audit businesses to check whether ITC claims are valid. Keep the following points in mind:
- Maintain proper records of all invoices, returns, and documents related to ITC claims.
- Ensure that ITC claimed is consistent with the actual business operations.
- Be ready to provide necessary documents in case of scrutiny or audit by GST authorities.