Input tax credit, ITC is the Services and Goods Taxes a taxable individual pays on any business-related purchase.
Under the Goods and Services Tax (GST), a supplier can claim an Input Tax Credit for the amount of tax paid during the acquisition of products to reduce the amount of tax owed on the sale of those goods. The tax will be calculated based on added value to avoid paying taxes twice. Input Tax for a taxable person means the tax imposed on any supply of products or services utilised in the conduct or growth of his company, but not the composition levy tax.
Although GST is a unified tax system, it comprises three separate taxes Central Goods and Services Tax, State Goods and Services Tax, and Integrated GST and a corresponding Cess. Therefore, the taxpayer is responsible for making timely tax payments and claiming appropriate ITC. We’ll explain ITC under GST. According to Section 77 of the Central Goods and Services Tax Act 2017, if a registered person makes a mistake when paying their taxes, they must pay the proper amount and then request to have any previously paid taxes refunded.
Laws That Apply
The rules for applying ITC to GST obligations are laid out in section 49(5), section 49A, and section 49B of the CGST act 2017, rule 88A of the CGST rules 2017, and circular no. 98/17/2019 dated April 23, 2019. To reduce the amount of money exchanged between the federal government and the states on IGST, the CGST Amendment Act of 2018 changed above, which took effect on February 1, 2019.
On July 1, 2019, the GST Registration portal announced that it had been upgraded to accommodate the new ITC utilisation system. From July 1, 2019, all registered entities must submit GST returns based on the new ITC use system.
ITC Eligibility under GST
The following are the key points to remember:
- Any inputs that were in stock or in a partially completed state immediately before the date on which the taxpayer became liable to pay tax can be claimed as Input Tax Credit under GST as long as the taxpayer has registered for new registration.
- Anyone can participate in a voluntary registration programme. Taxes still need to be paid by the individual, even if his annual revenue is below the minimum level. On the day of his registration, he might claim Input Tax Credit under GST for any products he had in stock.
- An individual chosen for a composition plan may receive an Input Tax Credit under Service and Goods Tax for “goods held in stock” on the day before he becomes obliged to pay tax as an average taxpayer.
The Amended Law on Order of ITC Set-Off
The order of ITC utilisation for each tax head has been clarified by CGST Circular No. 98/17/2019, which was released on April 23, 2019. It further added that taxpayers have till July 2019 to use the service offered on the GST portal before Rule 88A of the CGST Rules was enforced there. Beginning with returns in July 2019, the facility was made available.
The first two sections added to the CGST Act are as follows: “Section 49A: Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax, or Union territory tax shall be utilised towards payment of integrated tax, central tax, State tax, or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been fully utilised towards such payment.
The Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the input tax credit on account of integrated tax, central tax, State tax, or Union territory tax, as the case may be, towards payment of any such tax. This is true notwithstanding anything contained in this Chapter and subject to the provisions of clauses (e) and clause (f) of sub-section (5) of section 49.
The regulation 88A was subsequently added to notify the public of the aforementioned new provision via CT notification number. 16/2019, dated March 29, 2019.
Rule 88A: Input tax credit utilisation in the following order: – Input tax credit for integrated tax must be used to pay integrated tax first. Any residual funds, if any, may then be used to pay central tax, state tax, or union territory tax, depending on the situation, in any sequence. As long as the input tax credit available on account of integrated tax has first been fully utilised, the input tax credit on account of central tax, state tax, or union territory tax may be used toward payment of integrated tax, central tax, state tax, or union territory tax, as the case may be.
According to the Circular No. 98/17/2019 dated April 23, 2019, it has been made clear that: In accordance with Section 49 of the CGST Act, integrated tax credit must be used first for payment of integrated tax, followed by central tax and state tax, in that sequence.
As a result, in some circumstances, a taxpayer may be required to settle his tax debt for one type of tax, such as a state tax, through an electronic cash ledger while having an unutilized input tax credit for another type of tax, such as a central tax, recorded in an electronic credit ledger.
The newly added rule 88A in the CGST Rules permits the use of the integrated tax input tax credit toward the payment of Central tax, State tax, or, as applicable, Union Territory tax in any order, subject to the requirement that the integrated tax input tax credit must be used up in full before the central tax credit, state tax credit, or union territory tax credit can be used.
What Is the Maximum ITC That Can Be Utilised to Pay GST Liability?
Certain taxpayers will not be allowed to use the ITC balance in the computerised credit ledger as of January 1, 2021, to satisfy more than 99% of their tax obligations for a given tax quarter. It implies that at least 1% of the tax due must be paid in cash.
It applies to those taxpayers whose monthly taxable supply value exceeds Rs. 50 lakh (not being exempt or zero-rated supplies). Taxpayers listed below are exempt from this restriction:
- A registered taxpayer who filed belated IT returns for himself, his owner, any two partners, managing director, trustee, board, etc. that totaled more than Rs. 1 lakh in income tax in the two most recent fiscal years
- A registered taxpayer who, as a result of zero-rated deliveries without payment of tax or an inverted tax structure, received more than Rs. 1 lakh as a refund of unused input tax credits under GST.
- For all of the tax periods thus far in the current fiscal year, a registered taxpayer paid more than 1% of his GST liability using solely his electronic cash ledger.
- Local governments, public utilities, statutory organisations, etc..
Methods of Using Input Tax Credits
Use CGST Inputs Tax Credit under GST
- They are applied first toward the cost of a CGST on a product or service.
- After that, it goes to the payment of IGST on the product’s final sale.
However, SGST cannot be modified with Input Tax Credit from CGST’s Goods and Service Tax. First, let’s look at an example:
- Assume the supplier has a tax credit of Rs 5,00,000, the CGST is Rs 1,00,000, the IGST is Rs 3,00,000, and the SGST is Rs 2,00,000.
- The cash will be transferred from the CGST account to the IGST account to use the CGST input tax credit for paying IGST as reported in the monthly return.
Use our GST calculator to Calculate GST amount to be paid before registering for GST.
The Input Tax Credit for SGST under GST
The SGST input tax credit is:
- Initially applied to the settlement of SGST on produce.
- Then, it will go toward the payment of IGST on production.
However, the Goods and Services Tax (CGST) Input Tax Credit cannot be utilized to offset the CGST. For example:
- Suppose a supplier has a tax credit of Rs. 5,00,000, the output SGST is Rs. 1,00,000, the output IGST is Rs. 3,00,000, and the output CGST is Rs. 2,00,000.
- The SGST account will be debited, and the funds moved to the IGST account so that the IGST can be paid using the SGST tax credit as reported in the monthly return.
The utilization of IGST’s Input Tax Credit under GST
When calculating IGST Input Tax Credit for Goods and Services, the following method must be used:
- Previously applied to the settlement of IGST
- Then, it goes to the payment of the CGST on the production.
- After that, it goes to the collection of the SGST on the product’s final sale.
- Assume the provider has access to Rs. 5,000,000 in Input Tax Credit under GST, the resulting CGST is Rs. 1,00,000. the resulting IGST is Rs. 3,00,000. and the resulting SGST is Rs. 2,00,000.
- Input Tax Credit under GST will now be adjusted from IGST before CGST and SGST so taxpayers can take advantage of IGST’s tax benefits.
GST Input Tax Credit Requirements
Tax invoice with GST
It’s essential for claiming your input tax credit. Any time you pay GST as an input, you should keep the corresponding GST Tax Invoice.
Acquire the products & services
Receiving the goods or services for which a tax credit reimbursement is being sought is a prerequisite to making such a claim. Goods and services tax refunds depend on receiving appropriate documentation of the ITC claimed. The supplier or dealer must also provide documentation proving that they have paid the proper taxes to the relevant authorities. If Goods and Services Tax (GST) has not been paid and documentation of payment has not been kept, then no Input Tax Credit refund can be claimed.
To file a GST return
Each taxpayer must submit GST returns to the relevant GST authorities. This means you’ll need a copy of your GST return to claim your ITC. Details of transactions must be provided in returns so they may be easily verified and examined for the legitimacy of input tax credit given to dealers of specified services or goods.
Strategies for using ITC
Due to the flexibility with which IGST’s can be distributed, the following approaches can be taken:
- If a CGST credit is available, the IGST credit can be utilised to offset the CGST liability.
- If an SGST credit is available, the IGST credit can be applied to the SGST obligation.
- Aim for the lowest possible cash outlay for CGST or SGST obligations during this process.
An input tax credit can be manually offset against output tax liabilities through the GST: https://www.gst.gov.in/ site. It is recommended that taxpayers make the most of their available ITC by strategically allocating credits each tax season. If the current offset mechanism is optimised, it does not increase the need for working capital over the previous system. If you’re a business owner who needs help understanding how to claim ITCs under GST, don’t hesitate to contact the helpful expert Vakilsearch.
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