Input Tax Credit

SECTION : Input Tax Credit

  • Lesson Objectives

    On completion of this lesson, you will be able to understand:

    ·      Meaning of Input Tax Credit

    ·      ITC set off as per GST Law

    ·      Section 16 – Eligibility and Conditions for ITC

    ·       Components of Input Tax

    ·       Time Limit for taking ITC


    Please go through the First Video of the Chapter 10.

    Input tax in relation to a taxable person, means the Goods & Service Tax charged on any supply of goods and/or services purchased by him, which are used or are intended to be used, in the course or furtherance of his business.


    The definition of input tax includes the tax payable under reverse charge mechanism also. The credit can be availed if such goods and/or services are used, or are intended to be used, in the course or furtherance of his business.


    Tax Liability of a Person (except under composition scheme) is calculated using the below formula.


                                       Tax Liability = Output Tax – Input Tax



    ·        Output Tax means tax collected from Customers on supply of goods or services.

    ·        Input Tax means tax paid to suppliers on purchase of goods or services.

    ·        Claiming Input Tax Credit refers to deducting the Input Tax from Output Tax.


    Different definition of “input tax” in three acts viz. CGST, SGST and IGST Acts

    Input tax consists of IGST & CGST in CGST Act and IGST & SGST in SGST Act.

    In the IGST Act, input tax consists of all three taxes namely, IGST, CGST and SGST. Credit of all three can be used for discharging IGST liability, whereas only credit of IGST & CGST can be taken in CGST Act and that of IGST & SGST can be taken under SGST Act.

    Further the credit of CGST & SGST cannot be cross-utilized.


    Components of Input Tax

    Components of Input Tax Credit include CGST/ IGST/SGST paid on

    1.      Input goods

    2.      Input services and/ or

    3.      Capital goods


    It may be noted that credit of tax paid on capital goods also is permitted to be availed in one installment.


    Capital Goods:-Goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.


    Conditions necessary for obtaining ITC

    As per the GST Law, following four conditions are stipulated:

    (a) The registered taxable person should be in possession of tax paying document issued by a supplier i.e. invoice;

    (b) The taxable person must have received the goods and / or services;

    (c) The tax charged on such supply has been actually paid to the government either in cash or through utilization of input tax credit; and

    (d) The taxable person should have furnished the return.


    Condition for obtaining ITC

    GST LAW provides that the ITC would be confirmed only if the inward details filed by the recipient are matched with the outward details furnished by the supplier in his valid return.

    In case of mismatch between the inward and outward details, the supplier would be required to rectify the mis-match within a period of two months.


    If the mis-match continues, the ITC would have to be reversed by the recipient.


    Recovery mechanism for wrongly availed credit

    There is a recovery mechanism for wrongly availed credit. The wrongly availed credit would be recovered from the registered taxable person.


    Interest / Penalties also will be applied.


    Input Tax Credit Reversal if payment not done by Buyer

    Now, to continue to claim the input tax credit the buyer has to ensure that he pays the supplier within 180 days from date of invoice. If payment to vendor is not made within 180 days the input tax credit will have to be reversed and availed again on payment to vendor.

    Time Limit for taking ITC

    Input Tax Credit is Tax paid on purchase of goods and services which are used in business. Input Tax Credit can be deducted from Tax Liability of the Taxable Person.


    There is a time limit for taking Input Tax Credit (ITC).

    ITC cannot be taken beyond

    ·        The month of September of the following FY to which invoice pertains or

    ·        The date of filing of annual return

    Whichever is earlier.


    The underlying reasoning for this restriction is that

    ·        No change in return is permitted after September of next FY.

    ·        If annual return is filed before the month of September then no change can be made after filing of annual return.


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