What is INPUT TAX CREDIT (ITC)?

It simply means to avail credit of for input tax 

What does ITC practically do?

For example : 

Mr. X purchased raw materials from Mr. Y & paid ₹110000 (inclusive of GST of 10000). 

Then, Mr. X sold finished goods & received ₹150000 (inclusive of GST of 15000)

Now, while Mr. X shows total GST payable, he can avail of the credit of GST of ₹10000, which he paid while purchasing the goods against ₹15000, which he has received by selling the goods & pay a total GST of ₹5000 only to the government. 

When Mr. Y sold goods to Mr. X, Mr. Y will file his monthly return GSTR- 3B in which he will file consolidated information of his sales, purchase& ITC. After him filing this return, the purchase made by Mr. X gets automatically displayed in Mr. X's GSTR- 2B (which includes all the purchases made by Mr. X). Now when Mr. X is filing his monthly return GSTR - 3B, firstly he will match the total tax portion in GSTR - 2B & the total tax portion in the Purchase records of books of accounts. & if everything is matching Mr. X will file GSTR- 3B & avail the ITC & pay his GST portion.

What is INPUT TAX?

Input tax means tax charged on the supply of goods or services or both made to a registered person, which includes;

1. IGST, CGST, SGST/UTGST on goods or services, or both.
2. IGST paid on import of goods.
3. Tax paid under reverse charge method (RCM).

But doesn’t include tax paid under the composition levy scheme. 

Who is ELIGIBLE for availing ITC?

ONLY REGISTERED PERSON (excluding international organization with UIN) shall be eligible for availing ITC on goods or services or both which are used in the course of business. 

What are the CONDITIONS for taking ITC?

1. Registered persons should have the invoice or debit note or bill of entry or other supporting document related to the purchase In the course or furtherance of business. 

• The registered person has received the goods or services in the course or furtherance of business. The date of receipt of goods or services is important,  not the date of entry in books of accounts.
• Supplier of goods has paid the tax or registered person can also take ITC on self-declaration. 
• The registered person has filed a valid return.

1. ITC can only be taken if there is all the details required to be mentioned on an invoice are present. Mainly description of goods & services, total value, tax amount, place of supply in case of inter-state supply, GST IN of supplier & recipient.
2. When there is a single invoice issued for the supply of goods, but the goods are received in lots or installments,  ITC can be claimed only after receipt of the last lot or installment. 
3. Depreciation under section 32 of the Income-tax act,1961 should not be claimed on the GST component.
4. If the goods or services are provided to a third party on the direction of the registered person. Then the registered person can take ITC after receipt of goods or services by such a third party.

What is the TIME LIMIT to take ITC?

1. The due date for filing September month return after the end of the financial year 

                                                    OR

1. Date of filing an annual return, 

WHICHEVER IS EARLIER.

What if the recipient fails to make the PAYMENT OF INVOICE?

    Payment for the invoice is to be made within 180 days from the date of issue of the invoice. If not paid, the credit availed by the recipient will be added back to his output tax liability (reverse the credit availed)., with interest paid @ 18% from the date of availing credit till the date when the amount is added to the output tax liability Of month immediately succeeding the month in which 180 days are expired.

The exception to ITC reversal even if no payment is made:

• ITC availed for tax paid under RCM
• Supplies with no consideration. 

What is the MAXIMUM ITC to be availed by the recipient each month?

Situation 1: when invoice/debit note has not been uploaded by the supplier in their GSTR-1

 In this case, only 10% of the eligible ITC  or actual eligible ITC, whichever is lower shall be available. 

Situation 2: when invoice/debit note has been uploaded by the supplier in their GSTR-1

In this case, full 100% ITC, if all the other conditions of availing ITC are fulfiller shall be available. 

Can we RE – AVAIL the ITC NOT avail in the future?

Yes, we can re – avail of the ITC not availed. If it was not availed because of the payment issue when the payment is made in full. OR, if we had reversed earlier due to reasons like an invalid invoice, the counterparty’s not uploading of the invoice, etc., they can be availed once the invoice is corrected or the counterparty uploads the invoice. No time limit for - availing of GST.

What are certain supplies for which ITC IS NOT ALLOWED  (BLOCKED CREDIT)?

1. MOTOR VANS & CONVEYANCE.

• Purchase of motor van for the transportation of passengers:

*13 seats including driver

• Purchase of a motor van for the transportation of goods:

ITC is allowed 

However, In this case, ITC will be allowed unlike the above,

 ~ if the purchase of a motor van is for further supply of a motor van in the course or furtherance of business.

~ if the purchase of a motor van is made for imparting motor driving skills.

~ if the purchase of a motor van is for providing transportation services for passengers.

• Purchase of vessels & aircraft: ITC not allowed. 

However, In this case, ITC will be allowed unlike the above,

~ if the purchase of vessels & aircraft is for further supply of motor vans in the course or furtherance of business.

~ If the purchase of vessels & aircraft is made for imparting motor driving skills.

~ If the purchase of vessels & aircraft is for providing transportation services for passengers. 

~ If the purchase of vessels & aircraft is for the transportation of goods.

1. Renting, leasing & hiring of motor van, vessels & aircraft.

                 Except when:

• Used for the purposes in exceptions above; and,
  • When used for making similar category  services ( example:- passenger transport services with or without driver)
  • When used by employers for employees’ employment agreements.

1. Repairs, insurance & maintenance of motor van, vessels & aircraft.

        Except when:

• Used for the purposes in exceptions above; and,
  • When received by manufacturers of such vehicles.
  • When insurance company taking reinsurance service.

1. WORKS CONTRACT SERVICES FOR CONSTRUCTION OF IMMOVABLE PROPERTY.

•  A works contract is the supply of both goods & services in combination. 
• Construction includes reconstruction, renovation, additions or alterations, or repairs which is not capitalized 
• Services are taken for construction activities like office buildings and factory buildings. However, ITC is allowed for builders, developers & contractors who are undertaking construction for others.
• ITC is not available in respect of expenses capitalized in books of accounts. However, ITC is available for routine construction-related services like repairs, maintenance, renovation, etc.
• ITC on works contract services for the construction of an immovable Property Is blocked except when,

~ It’s a service taken for further supply of works contract service (subcontracting).

~ If immovable property is a plant & machinery**. 

~ When the value of works contract service is not capitalized 

1. SELF-CONSTRUCTION OF IMMOVABLE PROPERTY :

• If the taxpayer procures goods & services & constructs an immovable property (other than plant & machinery) without taking any works contract for being used in the business. No ITC is available. 

However, ITC for goods or/& services used in the construction of the immovable property is available only:

• If the construction is of plant & machinery**
• When the value of goods or/& services is not capitalized. 
• When construction is not on its own account 

**plant & machinery excludes land & building, pipeline outside the factory, and telecommunications towers.

1. FOOD & BEVERAGES, OUTDOOR CATERING, HEALTH SERVICES & OTHER SERVICES.

• Food & beverages, outdoor catering, beauty treatment, health care services, cosmetic & plastic surgery, Life insurance& health insurance are not allowed to ITC.
• However, if such goods or services are allowed for ITC when:-
  • Used for the same category of outward supply including as an element of mixed or composite supply.
  • Used to provide it to the employee by employer as an obligation under the employment contract.

       ●  membership of clubs, health & fitness centers, travel benefits extended to employees on vacations such as leave travel concession are not allowed to ITC

●  However, if such goods or services are allowed for ITC when:-

-  Used to provide it to the employee by the employer as an obligation under an employment contract.  

1. Any goods lost, destroyed, stolen, written off, or disposed of by way of gifts or samples are not allowed for ITC.
2. TAX PAID GOODS &/OR SERVICES UNDER COMPOSITION SCHEME, NON-RESIDENT TAXABLE PERSON ( who has no fixed place of business in India,  but occasionally supplies goods &/or services in India) except goods imported by him, are not allowed to take ITC.
3. TAX PAID IN FRAUD CASES, DETENTION, CONFISCATION,  ETC ARE NOT ALLOWED FOR ITC.
4. TAX PAID ON ANY GOODS OR/& SERVICES USED FOR PERSONAL CONSUMPTION.

How is ITC APPORTIONED?

How is APPORTIONMENT CLASSIFIED FOR DIFFERENT USAGE OF GOODS & SERVICES?

*zero-rated supplies means any of the following supplies of goods or services or both, 

a) export of goods or services or both; or 

b) supply of goods or services or both to a special economic zone (SEZ) developer or a Special economic zone unit.

**exempt supplies mean the supply of goods or services or both  which has nil rate of tax