What is Input Tax Credit and how to claim it

Last Updated at: Jul 25, 2020
What is input credit_ and how to claim it_
The Central Board of Indirect Taxes and Customs (CBIC) has stated that input tax credit accrued on imports will now be obtained through refunds, in a way to offer relief to industry.


Understanding the indirect taxation system in India was a tough task for all companies. However, things have changed for the better after the goods and services tax was imposed on all businesses. It gave rise to questions on the methods of claiming the input tax credits but the problem was solved pretty quickly.

The tax system of India was a complex system up until the GST Bill was passed. After the imposition of taxes on the basis of the GST norms, one of the main grievances of the goods and service providing taxpayers was omitted, that was the input credit. There were repeated taxes being levied on them and this is called the “cascading effect”.  The major disadvantage of the cascading effect was the Input Tax Credit (ITC). In short, when a taxpayer buys input for his business, he is asked to pay taxes for the input goods and later also made to pay the taxes for the sale of the output of the business. In this case, the manufacturer can levy the amount he had paid in the input tax from the output tax he is supposed to pay. For instance, if the manufacturer buys input materials for Rs.100 and has to pay Rs.250 as the output tax, he can very well subtract the Rs.100 from the output tax and just pay Rs.150 as output tax. This option of claiming input tax credit by the manufacturers is considered as one of the main features of GST and essentially reduced the tax burden on the manufacturers.

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Some conditions to be fulfilled to claim ITC

  1.  Must be a taxpayer registered as a taxable person under GST.
  2. Supporting documents like Tax invoice, debit note, supplementary invoice, etc. are required.
  3.  It is prerequisite to file all applicable GST returns.
  4.  Only goods used for business purposes can be claimed ITC.
  5.  In case a person is receiving goods in lots, the ITC can be claimed only after delivery of the final lot and not any time before.

Who is not eligible to claim ITC

  1. Taxpayers who have availed the membership under GST composition scheme.
  2. Goods and services that have been used for personal uses other than that of business purposes; either by the company or by the employees.
  3. Contracted constructors who have agreed to build immovable properties (other than plant and machinery) are not eligible.
  4. When depreciation has been claimed on the cost of the capital goods that also includes ITC, they cannot claim ITC separately once again.

How to claim input tax credit

For example, consider that X sells raw materials for the manufacture of goods by Y. Y sells the finished goods paying various sales tax and both the parties will then have to file the GST returns (GSTR). Further, the process of claiming input tax credit proceeds as follows:

  1.  The GSTR 1 is filed by the company X. (outward supply)
  2.   These details get automatically reflected in GSTR 2A for substantiating as evidence for the transaction between X and Y. (inward supply)

3. Now, Y is allowed to refer the GSTR 2A and make any changes or additions to the details whatsoever.

3.  After the finished goods are sold, Y has to file GSTR 2 which will be reviewed by X and changes or additions can be made accordingly from GSTR 1A that automatically gets reflected from GSTR. 

4. When X files their monthly returns under GSTR 3 and has paid off their tax liabilities, Y is now eligible to avail the input tax credits. This credit can be used to reduce output taxes. 

5. In cases where the input tax is greater than the output taxes, the extra amount could be carried over or refunded as per the requirement of the manufacturer. On the other hand, if the output tax is greater than the input tax, then the difference must be paid by the manufacturer.

6. At each stage of the production and manufacturing process, taxes are being imposed on the manufacturers by the state and central governments. However, the taxes collected by one government cannot be used to offset the tax paid to another, i.e. SGST input credit and CGST input credit cannot be used to pay off each other but rather used only to offset themselves. Even though there exist such restrictions with claiming ITC under GST, the double tax liability over most manufacturers and sellers of goods and services is being reduced to a great extent.

It is important to understand that all businesses who have claimed all the benefits associated with the GST composition scheme are not allowed to make use of Input Tax Credit. At the same time, you can’t claim ITC on the services and products which have been used for personal consumption.