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Unlocking Tax Benefits: A Practical Guide to Maximizing GST Input Tax Credit

In the dynamic landscape of taxation, understanding Input Tax Credit (ITC) is pivotal for businesses. This article acts as a guide to demystifying the eligibility criteria, documentation requirements, and the intricate process of claiming and utilizing Input Tax Credit. As businesses navigate the complexities of taxation, this guide serves as an indispensable resource, providing clarity on maximizing benefits through the Input Tax Credit mechanism.In the dynamic landscape of taxation, understanding Input Tax Credit (ITC) is pivotal for businesses. This article acts as a guide to demystifying the eligibility criteria, documentation requirements, and the intricate process of claiming and utilizing Input Tax Credit. As businesses navigate the complexities of taxation, this guide serves as an indispensable resource, providing clarity on maximizing benefits through the Input Tax Credit mechanism.

What is Input Tax Credit?

Input Tax Credit (ITC) serves as a pivotal mechanism in the Goods and Services Tax (GST) framework, encompassing Central Tax (CGST), State Tax (SGST), Integrated Tax (IGST), and applicable cess. It is the tax paid by a registered individual during the supply of goods or services, including reverse charge payments and IGST on imported goods.

In the GST supply chain, every registered entity plays a role in tax control, collection, and remittance. Input Tax Credit becomes crucial to avoid double taxation and mitigate the cascading impact.

The Input Tax Credit mechanism is a linchpin for businesses, offering a pathway to cost efficiency, effective tax management, and a level playing field in the complex realm of GST.

Documents Required for Claiming GST Input Tax Credit

  1. An invoice issued by the supplier in accordance with the provisions of Section 31 of the CGST Act 2017.

  2. A debit note issued by the supplier in accordance with the provisions of Section 34 of the same act.

  3. An invoice issued  by the recipient along with proof of payment (received from an unregistered person and as per reverse charge).

  4. A credit note/invoice or any document issued by an input service distributor.

GST Implementation to Input Tax Credit

The implementation of GST streamlined the process, reducing complexities and promoting a unified approach to indirect taxation. The Goods and Services Tax Network (“GSTN”) has issued an advisory dated 17/10/2021, for taxpayers regarding the availability of Input Tax Credit (“ITC”) for Financial Year 2020-21. This can be stated as follows:

  1. As per Section 16(4) of CGST Act, 2017, no taxpayer shall take input tax credit in respect records (invoices and debit notes) for supply of goods or services (or both) for Financial Year 2020-21 after the due date of furnishing the return for the month of September 2021.

    • Records of the invoice or debit notes pertaining to Financial Year 2020-21 reported in GSTR-1 after due date of GSTR-3B of September 2021 will not reflect as “ITC Available” in GSTR-2B of the recipients. 

    • The records pertaining to Financial Year 2020-21 reported in GSTR-1 after due date of GSTR-3B of September 2021 will also not reflect as “ITC as per GSTR-2A” in Table-8A of GSTR-9 of the recipients.

It is to be noted to the taxpayers of the above and ensure that their records pertaining to Financial Year 2020-21 are reported on or before the due date of their GSTR-3B for the month September 2021, or for the quarter of July to September 2021 in the case of quarterly GSTR-3B filers.

Different Types of Input Tax Credit

Understanding the various types of Input Tax Credit is crucial for businesses. From credit on goods and services to credit on capital goods, each category plays a distinct role in optimizing tax liabilities. Below are the different types of input tax credit under GST:

Input Tax Credit on Integrated Goods and Services Tax (IGST) for Imported Goods:

 When businesses import goods, Integrated Goods and Services Tax (IGST) is to be paid at customs. They can claim Input Tax Credit for the IGST paid on imported goods.

Input Tax Credit on Capital Goods:

ITC on capital goods includes the tax credit businesses can claim on the purchase of assets like machinery, equipment, or computers used for their operations.

Input Tax Credit on Inputs (Raw Materials):

Input Tax Credit (ITC) on inputs refers to the credit businesses can claim for the tax paid on raw materials purchased for production.

Input Tax Credit on Input Services:

Businesses can also claim credit for the tax that is paid on services used in their operations. It includes services such as legal advice, accounting services, or consultancy fees.

Input Tax Credit on Reverse Charge Mechanism (RCM):

The Reverse Charge Mechanism (RCM) involves the recipient of the goods or services paying the tax directly rather than the supplier. Businesses can claim Input Tax Credit on such reverse charge transactions.

How to Apply for Input Tax Credit

Applying for Input Tax Credit involves adhering to specific procedures. This section will provide a step-by-step guide to the application process, ensuring businesses can harness the benefits effectively.

To declare and file a claim of ITC under Section 18 (1) (a) in Form ITC-01, you have to perform the following steps:

Step 1: Login and Navigate to ITC-01 page

  1. Access the www.gst.gov.in URL. Then the GST Home page is displayed.

  2. Login to the GST Portal with your valid credentials.

  3. Click the Services > Returns > ITC Forms command.

The GST ITC Forms page is displayed. In the GST ITC-01 tile, click the “Prepare Online” button to prepare the statement by making entries on the GST Portal.

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Step 2: Declaration for claim of input tax credit under sub-section (1) of section 18

Select the appropriate section from the claim made under the drop-down list.

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Step 3: Preview GST ITC-01

Click the “Preview” button to preview the draft for GST ITC-01.

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Step 4: Submit GST ITC-01 to freeze data

  • Click the “Submit” button to submit GST ITC-01.

  • Click on “Proceed.”

  • Once you submit the data, it is frozen, and you cannot change any fields. 

  • Refresh the page, and the status of GST ITC-01 changes to “submitted” after the submission of GST ITC-01.

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Step 5: File GST ITC-01 with DSC/ EVC

  • Select the checkbox for declaration.

  • In the “Authorized Signatory” drop-down list, select the authorized signatory. This will enable two buttons, “File ITC with DSC” and “File ITC with EVC.”

  • Click the File ITC with DSC or File ITC with EVC button to file GST ITC-01.

  • The success message is displayed. Application Reference Number (ARN) code allocated by the Association of Mutual Funds in India (AMFI), required by the Asset Management Companies (AMC), is generated, and SMS and email are sent to the taxpayer.

  • Refresh the page.

 

The status of GST ITC-01 changes to “Filed.”

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Govt. Rules and Regulations for Input Tax Credit

A comprehensive understanding of government rules and regulations is imperative for businesses to stay compliant. This section will elucidate the key guidelines governing the Input Tax Credit.

In this regard, let us have a look at some of the rules and regulations for input tax credit based on budget amendments.

Budget 2022 and CGST Rule Amendments: Impact on ITC Claims

21st December 2021 Amendment:

  • From January 1, 2022, ITC claims are allowed only if they appear in GSTR-2B. Taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4), emphasizing the alignment of every ITC value with GSTR-2B.

29th December 2021 Amendment:

  • CGST Rule 36(4) is amended to remove the 5% additional ITC over GSTR-2B. From January 1, 2022, businesses can only avail ITC if it is reported by the supplier in GSTR-1/IFF and appears in their GSTR-2B.

1st February 2022 Updates:

  1. Restrictions in GSTR-2B: ITC claims are no longer possible if restricted in GSTR-2B under Section 38.

  2. Revised Time Limit: The time limit for claiming ITC on invoices or debit notes in a financial year is now the earlier of two dates – 30th November of the following year or the date of filing annual returns.

  3. Revamped Section 38: Renamed as 'Communication of details of inward supplies and input tax credit,' aligning with Form GSTR-2B. It specifies the manner, time, conditions, and restrictions for ITC claims, eliminating the two-way communication process in GST return filing. 

  4. Changes in Section 41: Revamped to remove references to provisional ITC claims, prescribing self-assessed ITC claims with conditions.

  5. Elimination of Sections 42, 43, and 43A: The provisional ITC claim process, matching, and reversal sections are eliminated.

How to Check Input Tax Credit?

Efficient management of ITC includes regularly checking the available credit. This segment will guide businesses on the steps to check Input Tax Credit, fostering proactive financial management.

Accordingly, the input tax credit can be availed only if the said credit is not restricted as per the details communicated to the recipient under Section 38 of the CGST Act.

Thus, the situation of the proposed amendment is summarized below:

Particular
Input Tax Credit
Credit restricted as per GSTR-2B
Input Tax Credit not available
Credit not restricted as per GSTR-2B
Input Tax Credit available

Steps to check Input Tax Credit include:

Step 1: Calculating Common Credit

Begin by determining the common credit, denoted as C2, through the following steps:

  • T : Total input tax related to inputs and input services in a tax period 

  • T1: Subtract input tax on items for non-business purposes 

  • T2: Subtract input tax on items for exempt supplies 

  • T3: Subtract ineligible input tax

  • C1: ITC credited to Electronic Credit Ledger 

  • T4: Subtract input tax on items for taxable supplies, including zero-rated supplies

The result, C2, represents the common Input Tax Credit available for apportionment.

Step 2: Calculating Exempt Supplies Credit

Calculate the credit attributable to exempt supplies (ineligible credit), denoted as D1, through the formula:

D1= (E/F) x C2 

Where:

  • D1 is the amount of input tax credit attributable to exempted supplies.

  • E is the aggregate value of exempt goods or services during the tax period.

  • F is the total turnover in the state of the registered person during the tax period.

  • C2 is the common credit available.

Step 3: Calculating Non-business Purpose Credit

Calculate the credit attributable to non- business purposes, denoted as D2, using 5% of C2:

D2 = 5% of C2

Where:

D2 is the amount of input tax credit attributable to non-business purposes.

H4 - Step 4: Determining Total Eligible ITC

Finally, calculate the total eligible ITC, denoted as C3, using the formula:

C3 = C2 – (D1 + D2) 

Where:

C3 is the eligible input tax credit from the common credit.

 

Apart from this, some of the relevant documents required for Input Tax Credit (ITC) claims are as stated below:

 

  1. Supplier Invoice: Ensure possession of the original invoice issued by the supplier for the goods or services received.

  2. Debit Note (if applicable): If a debit note is issued by the supplier to the recipient, it should be included in your documentation.

  3. Bill of Entry: Obtain the bill of entry for imported goods, an integral document for ITC claims related to imports.

  4. Invoice under Special Circumstances: In specific scenarios, like when the bill of supply is issued instead of a tax invoice (for amounts less than Rs 200) or in cases of reverse charge applicability, ensure the availability of the relevant invoices.

  5. Invoice or Credit Note from Input Service Distributor (ISD): Include invoices or credit notes issued by the Input Service Distributor (ISD) in accordance with GST invoice rules.

  6. Bill of Supply: Secure the bill of supply issued by the supplier of goods and services or both, an essential document for certain transactions.

 

Having these documents in order not only ensures compliance with GST regulations but also facilitates a smooth process for claiming Input Tax Credit.

Final Thoughts:

In summary, Input Tax Credit emerges as a formidable instrument, enabling businesses to adeptly navigate the complexities of GST while strategically optimizing their financial standing. Profound comprehension of the intricacies inherent in the Input Credit Mechanism, unwavering compliance with the GST Act, and strategic ITC claims empower businesses to unlock significant tax advantages.

Want to ease the process of tax filing by letting experts take care of it? TaxBuddy is here to help you out. Reach out for personalized advice or schedule a demonstration to explore advanced tax optimization methods. Stay updated with all the changes in the world of taxation by subscribing to us, and share this guide with your friends. Do you think we missed out on anything? Let us know. We’d be happy to get a feedback.

Frequently asked questions

Q

 What is Input Tax Credit (ITC)?

A

Input Tax Credit (ITC) is a benefit that businesses enjoy under the Goods and Services Tax (GST) system. It allows you to reduce the tax you pay on the goods and services you purchase for your business.

Q

How do I claim Input Tax Credit?

A

To claim ITC, you need to ensure that the supplier has provided you with a valid tax invoice. This invoice should detail the GST you've paid on your purchases.

Q

Are there any restrictions on what I can claim ITC for?

A

While most business-related purchases are eligible, there are a few exceptions, such as goods and services used for personal enjoyment or luxury items.

Q

 Is there a time limit for claiming Input Tax Credit?

A

Yes, ITC for a particular financial year must be claimed by the due date for filing the September return or the annual return, whichever is earlier.

Q

Can I claim ITC for goods purchased before GST was implemented?

A

Yes, there are transitional provisions that allow businesses to claim ITC on stock purchased before the introduction of GST.

Q

Can ITC be transferred to someone else if I don't need it?

A

No, ITC is specific to the business that made the original purchase and cannot be transferred.

Q

Are there any specific documents required for claiming Input Tax Credit?

A

Yes, a valid tax invoice and proof of payment are typically required.

Q

Can ITC be reversed or adjusted?

A

Yes, if the recipient fails to pay the supplier within 180 days, the ITC claimed on that invoice must be reversed.

Q

Can ITC be claimed on input services like rent and utilities?

A

Yes, ITC can be claimed on input services as well.

Q

What are the consequences of not following Input Tax Credit rules?

A

Non-compliance can result in penalties, interest, and the loss of ITC benefits, making it crucial to adhere to the rules and regulations.

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.