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Saving on Tax Through Input Tax Credit in India

Input means the goods which are purchased by the dealer during the time when his/her business was operational. As per Section 2(57) of the Model GST law and Section (1) (d) of the IGST Act, Input Tax Credit is the deduction an individual can avail on the payment of output tax if the tax on input has already been paid for.

For example; Tax on output is Rs. 450 and three inputs used for producing the output are namely A, B, and C. Tax paid on the purchase of input A is Rs. 100, input B is Rs. 120 and for Input C is Rs. 60. The tax that will be paid by the manufacturer will be Rs. 170

Tax = 450- (100+120+60).

This mechanism is available when the taxpayer is registered under GST. All dealers can claim Input Credit for the taxes paid by them on the purchases.

Procedure to Claim for Input Tax Credit

As per the GST law, return filed under the previous law for the period prior to July 1, 2017, can claim income tax credit. The amount claimed will be transferred to the Electronic Credit Ledger.

Following conditions must be satisfied by the existing dealers for claiming CENVAT Credit for the input held in stock, semi-finished or finished goods

  • Inputs or goods which are used for making taxable supplies under GST.
  • When a taxable person passes the benefits of such credit by way of reduced prices of the recipients.
  • The taxable person should be eligible for input tax credit on inputs under GST.

Input tax credit can only be claimed by manufacturers or dealers on those goods on which tax has been already paid under the previous tax law. Credits are only allowed if the document for taxes paid are recorded in the accounts of the taxpayer within 30 days of the appointed day. The 30-day extension may only be allowed by the competent authority if there is sufficient reason for the cause of the delay.

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There are few conditions which are needed to be satisfied to avail input-output tax credit. Such conditions are

  • GSTR-3 for return must be filed.
  • The tax charged by the supplier must be deposited with the government.
  • The dealer should be in possession of Tax Invoice or supplementary invoice issued by a supplier registered under GST law.

Input credit is allowed only when the supplier has deposited the tax collected from the taxpayers to the government. Every input credit claimed must match and validate. Hence, to claim input credit on purchases, the supplier must be GST compliance as well.

Input credit can also be left unclaimed but it will be a loss for the taxpayer. In case, tax on purchase is higher than the tax on sale then the taxpayer can carry forward the amount or claim refund against it. In short, if the tax on inputs is greater than the tax on output, then input tax is carried forward or refund can be claimed. But if the tax on output is greater than the tax on input, the balance is payable. No interest tax is payable on the balance of Input Tax by the government.

Points to be Remembered Regarding Input Credit

  • Input Credit cannot be claimed on those purchase invoices which are more than one year old, this period is calculated from the date on which invoice has been prepared.
  • As GST is charged on both goods and services so input credit can also be claimed on both goods and services, except on those goods which are mentioned in the negative list.
  • It is allowed on capital goods, but it is not allowed for goods and services for personal use.
  • Input tax credit must be claimed before filing for GST return, following the end of a financial year or for the relevant annual return (whichever is earlier).

Circumstances Under Which Input Tax Credit cannot be Claimed

  • If goods are purchased from any unregistered dealer.
  • If goods are purchased from a registered dealer who is under Composition Scheme.
  • If goods are notified in the negative list of the respective state government.
  • Goods which are purchased without an invoice.
  • Goods which are purchased with invoice but the separate amount of tax imposed on it is not mentioned in the invoice.
  • Goods which are purchased for manufacturing goods which are exempted from GST (other than exports).
  • Goods that have been already taxed in the previous act and are still in stock, though they are categorized as exempted goods under VAT Act.
  • Goods which are purchased for personal use or received as a gift.
  • Goods which are purchased from abroad and interstate purchases of goods.
  • Goods or services which are purchased for the construction of an immovable property whether to be used for personal or business use.
  • Travel benefits extended to employees for a vacation like leave travel allowance or home travel concession.
Circumstances Under GST

Some of the items included in the negative list are Motor Vehicles, except when they are supplied in the usual course of business or are being used for providing following taxable services:

  • Transportation of goods.
  • Transportation of passengers.
  • Providing training on Motor driving skills.

The following goods purchased are eligible to claim the benefits of Input Tax Credit:

  • Goods which are sold within the state.
  • Goods which are used as raw material, containers, consumable stores or packing materials for being sold anywhere inside in the country or abroad.
  • Goods which are used in the execution of the contract.
  • Goods which are used as capital goods while manufacturing.

Time Limit for Availing Input Tax Credit in India

The Input Tax Credit (ITC) can be availed within one year from the date mentioned on the invoice or debit note. It should be claimed before filing the GST return for the month of September, following the financial year in which the invoice is issued or before filing the relevant annual return, whichever is earlier.

Input Tax Credit on Capital Goods

Input Tax Credit is available to manufacturers and traders who trade in capital goods. The overall Input Tax Credit is spread over 36 equal monthly installments.

Any claim pending for a refund on the due amount of CENVAT credit, tax or any interest paid before the appointed day shall be disposed away according to the previous laws.

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