Goods and Service Tax

What is Input Tax Credit under GST?

calendar07 Aug, 2020
timeReading Time: 4 Minutes
Input Tax Credit

GST also is known as Goods and Services Tax, which is considered one of the most significant reforms that happened in India. Yet, one thing that is the discussion point is that the mechanism of input Tax credit under GST.

In simple form, Input Tax Credit means at the time of paying tax on sales, and you can decrease the taxes that you have already paid on purchases of the goods and services.

Update as per the latest changes related to Input Tax Credit under GST

Input Tax Credit under GST

What is the Input Tax Credit?

Input Tax Credit states that at the time of paying tax on output of products, and you can decrease the tax that you have already paid on inputs of the products.

Assume that you are a manufacturer of goods and services –

  • Tax payable on the FINAL PRODUCT is INR 450
  • Tax paid on PURCHASES is INR 300
  • You can claim the INPUT TAX CREDIT of INR 300, and you only need to deposit INR 150 in tax.

Read our article:A Complete Guide on How to Save Income Tax

Input Tax Credit under GST

Input Tax Credit Mechanism is available to you when you are covered under the GST Act[1]. This means if you are a manufacturer of products, suppliers of products, agents of selling or purchaser of products, e-commerce operator for product distribution registered under GST, You are eligible to claim Input Tax Credit for tax paid by you on your purchases.

How to claim Input Tax Credit under GST?

To claim Input Tax Credit under GST –

  • It would be of help if you had a tax invoice (of purchase) or debit note issued by the registered dealer of goods and services;

Where goods are received in installments, then the credit will be available against the tax invoice issued upon receipt of the last payment of the installment.

  • You should have received the goods/services

Where the recipient does not pay the value of service or tax thereon within three months of issuing of the invoice, and he has already availed Input Tax Credit created on the invoice of the said goods, the given credit will be added to the output tax liability along with interest of the Goods and Services.

  • The tax that is charged upon the purchases has been deposited or paid to the government by the supplier in cash or via claim the input Tax Credit;
  • The supplier has filed GST returns.

Possibly the most path-breaking reform of GST is that Input Tax Credit is only allowable if your provider has deposited the tax, he collected from you. So, every Input Tax Credit you are claiming shall be matched and validated before you can claim it.

Therefore, to allow you to claim Input Tax Credit on Purchases, all your suppliers must be GST compliant as well. There’s more you should know about Input Tax Credit

  • There is a possibility to have available Input Tax Credit due to tax on purchases being higher than the tax on the sale. In these types of cases, the tax is allowed to be carry forwarded or claim a refund on those ITC.
  1. If a tax on inputs is greater than tax on output, then it is equal to carry forward input tax or claim refund on ITC
  2. If tax on output is greater than tax on inputs, then it is equal to pay balance on ITC
  3. No interest is paid on input tax credit balance by the government.
  • The input tax credit can’t be taken on purchase invoices for goods and services that are more than one year old. The period of one year is calculated from the date of issuing of the tax invoice.
  • Meanwhile, GST is charged on both goods and services, Input Tax Credit can be availed on both products and services (except those who are on the exempted/negative list).
  • The input tax credit is permitted on capital goods also.
  • Input Tax Credit is not permitted on goods and services for personal use.
  • No input tax credit shall be allowed after GST return has been filed for September following the end of the fiscal year to which such invoice pertains or filing of relevant annual return, whichever is earlier.

Type of Taxes under GST

All existing taxes such as VAT, CST, Excise Duty, Service Tax, Entertainment Tax shall go away, and GST will replace them.

There are three categories of taxes under GST-

  • SGST – State GST
  • CGST – Centre GST
  • IGST – Integrated GST

Now let’s understand how INPUT TAX CREDIT works under GST

How to gain Input Tax Credit under GST?

To Avail Input Tax Credit under GST-

  • To pay IGST-Input Tax Credit is taken from CGST, SGST & IGST paid on purchases
  • To pay CGST- Input Tax Credit is taken from CGST & IGST paid on purchases
  • To pay on SGST-Input Tax Credit is taken from SGST & IGST paid on purchases

How Input Tax Credit works Under GST?

Suppose Mrs. X is a seller of goods and services. She sells goods to Mr. Y. The buyer, Mr. Y is now entitled to claim the purchase credit using her purchase invoices for goods and services.

  • Upload all the tax invoices details as per the  GSTR-1 form.
  • The specifics uploaded by Mrs. X is routinely populated or reflected in the GSTR-2A form. The same data will get reflected when Mr. Y files the form GSTR-2 returns, which the details of the purchase of the goods and services.
  • The details of the sale are accepted and acknowledged by Mr. Y. Then, the purchase tax is credited to Mr. Y’s ‘Electronic Credit,’ which can be used to adjust it afterward for future output tax liability and can also receive a refund.

How to apply for the Input tax credit under GST?

For the inter-state supply of goods and services, IGST is charged.

And for the intra-state supply of goods and services, CGST and SGST or UTGST are charged.

Conclusion

Input Tax Credit Mechanism is available to you when you are covered under the GST Act. This means if you are a manufacturer of products, suppliers of products, agents of selling or purchaser of products, e-commerce operator for product distribution registered under GST, You are eligible to claim Input Tax Credit under GST for tax paid by you on your purchases.

Our Corpbiz group shall be at your disposal if you seek expert advice on any aspect related to GST Registration along with complete compliance. We will help you ensure full compliance concerning all the demand based on your anticipated activities ensuring the productive and well-timed completion of your expectation.

Read our article:CBDT extended the Filing of ITR deadline till 30th September

Request a Call Back

Are you human? : 5 + 7 =

Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality