Input Tax Credit : Claims, Requirements and Calculations

An input tax credit is paid on the purchase of goods, by a business registered under GST law, and then used to decrease tax liability on the sale of the goods.

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What is Input Tax Credit (ITC) in GST

An input tax credit is paid on the purchase of goods, by a business registered under GST law, and then used to decrease tax liability on the sale of the goods. Using input tax credit businesses can claim the credit on the basis of GST paid on purchases. The GST tax system allows for every purchase by a business to match every sale by it as well, seamlessly integrating the use of input tax credit.

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How is input tax credit claimed?

When claiming GST input tax credit, the two businesses involved need to be registered entities under GST law. The input tax credit is claimed by the recipient business (RB), who purchases the goods from the supplier business(SB). The two businesses then reconcile their purchases and sales.

To give you a better idea, let’s consider the above two businesses - RB and SB.

  • At first, SB files the GSTR-1 form for the outward supplies, sold to RB.
  • The details of this form will then be made available to RB at the time of filing GSTR-2 for inward supplies, (for receipt of goods).
  • RB can then check their own records to confirm the information or make changes and then file GSTR-2. The input tax credit will then be credited to their own electronic cash ledger.
  • SB can then refer to their GSTR-1 form to view or accept the changes made by RB on GSTR-2.
  • RB can then file monthly returns with GSTR-3 and pay the tax liability as required, which will enable SB to claim the input tax credit on future liabilities.
  • In the event that purchase taxes are more than sales taxes, the surplus is added to the existing credit or refunded.
  • Input Tax Credit can be claimed:

  • If an individual is registered under GST law as a taxable person.
  • If good or services, on which input tax credit is claimed, has only been used for commercial transactions.
  • If goods, on which input tax credit is claimed, are free from GST (zero-rated goods or exports).
  • If a GST registered business changes its ownership, any pending or unused input tax credit will be transferred under new ownership as well.
  • If input tax is paid through electronic credit/cash ledger, by the business who purchases the goods.
  • On receipt of goods & services.
  • If all necessary and required (monthly/quarterly/annual) GST returns are filed.
  • If there is a large number of goods, and they are received in through several shipments, the input tax credit will only be applicable to them on receipt of final shipment.
  • Input tax credit cannot be claimed

  • If goods & services purchased are for the purpose of development of immovable assets (excluding plant or machinery).
  • If the tax paid on goods & services falls under the GST composition scheme.
  • If goods and services have been used for personal consumption.
  • If depreciation has been applied to the cost of capital goods and input tax credit has also been claimed as a result.
  • Input Tax Credit - Documents required

    While claiming an input tax credit, the portal will request for certain

  • Invoice for purchased goods.
  • Customs department issued a bill of entry for good purchased.
  • Bill of Supply issued by the supplier.
  • If required, a credit note issued by input service distributor or supplier.
  • If required, a debit note from the supplier.
  • Where the total amount of purchase is less than Rs.200 or if the reverse charge is applicable on the purchase amount, the invoice for purchased goods is similar to the bill of supply as issued by the supplier.
  • Final day to claim an Input tax credit

    When the tax invoice has been issued for a period of less than a year

  • If a person is registered under GST or has applied or will register, then he/she can claim Input tax credit from the day he/she becomes eligible to pay tax.
  • If a GST registered person starts paying tax based on the composition levy scheme, then he/she becomes eligible to claim an input tax credit, when he/she starts paying tax normally.
  • If an individual register voluntarily with GST, then he/she can claim an input tax credit from the day of registration.
  • When the tax invoice has been issued for a period of more than a year

  • The final day would be before filing GST monthly/quarterly return form for the month of September, after the end of the financial year for which the invoice was issued.
  • Or before the filing of the GST annual return.
  • Calculating Input Tax Credit under GST

    There are two parties involved, the supplying business (SB) who sells goods and the receiving business (RB) who buy the goods.

    So if RB buys goods worth Rs. 20000 from SB, at GST rate 12.5%, RB pays input tax of Rs. 2500/-

    Now, when RB sells the same goods at Rs, 25000/-, including output tax at 12.5%, the final price becomes 25000 + 3125 = Rs 28,1250/-

    RB can claim an input tax credit of Rs. 3125 - Rs. 2500 = Rs.600/-

    Learn more About GST Registration And Its Online Process.

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