All about Input Tax Credit (ITC) | GST Filing & Registration Service

What is Input Tax Credit?

Input Tax Credit, or ITC, is the tax a registered GST taxpayer pays on purchases that is refunded to them. He should get this tax back from the government.

For Example, A registered taxpayer made a sales invoice with Rs. 500 in tax for the final product and got that amount from the final customer. Let’s say he already paid a Rs. 200 tax when he bought the raw materials. Now, Rs 200 will be sent to the government by the supplier from whom he bought raw materials. So, this Rs 200 is the tax he paid on the inputs, which he can deduct from the tax he has to pay on the final product. So, the taxpayer only has to pay Rs. 300 in tax (i.e.Rs. 500 – 200).

Who is eligible for Input Tax Credit (ITC)?

According to Section 16 of the CGST Act of 2017, any registered taxpayer who meets the requirements can get an input tax credit (ITC) under GST.

NOTE: Because the tax on purchases is higher than the tax on sales, it is possible to have an unclaimed input credit. In this case, the taxpayer can claim a refund or carry the tax over to the next year. On input tax balances, the government does NOT pay interest. Find out how to get ITC by reading on.

Key Rules and Conditions governing ITC Computation and Reporting

Here is a quick review of the most important rules and conditions for figuring and reporting ITC:

Taxpayer should have the tax invoice, debit note, or other documents related to paying taxes.
The goods and services should have been sent to him.
The seller is responsible for paying this tax to the government.
The taxpayer has sent in a return under Section 39, which is Form GSTR-3B.
The invoice should be paid to the supplier within 180 days of the date it was sent.
If you claimed depreciation on the tax part of capital goods, you won’t be able to get an ITC.
There is a deadline for claiming ITC, which is September, when returns are due. This time, the deadline has been moved to November 30 of the next fiscal year or the actual filing date for the current fiscal year’s annual return.
When goods or services are used in part for business and in part for non-business purposes, only the part that is used for business can be claimed as an ITC.
When the same goods or services are used for both taxable and exempt supplies, only the credit for taxable supplies, including zero-rated supplies, can be claimed.

Rule 36 of CGST Rules 2017

Rule 36 of the CGST rule for 2017 explains what documents are needed and how to claim ITC. As per rule, a registered person and an Input Service Distributor can both get ITC if they have any of the following documents:

a bill of entry or any similar document prescribed under the Customs Act, 1962, or rules made thereunder;
a debit note issued by a supplier in accordance with Section 34;
a bill of entry or any similar document prescribed under the Customs Act, 1962, or rules made thereunder;
a bill of entry or any similar document issued by the supplier of goods or services or both in accordance with Section 31;
a bill of entry or any similar document issued by the supplier of goods or services or both in accordance with

ITC claims can’t be made on taxes that have already been paid because of an order, if that order was based on fraud, willful misrepresentation, or hiding facts.

Under the new Rule 86B, you can’t use ITC to pay off more than 99% of your tax bill if the value of your taxable supplies, excluding exempt and zero-rated supplies, is more than Rs. 50 lakhs in a month.

Input Tax Credit (ITC) on Reverse Charge

In forwarding charge transactions, the vendor has to pay the tax before the recipient can claim it as an Input Tax Credit (ITC). In reverse charge transactions, the recipient pays the tax and then claims it as an ITC (ITC).

Even so, the above conditions still apply for figuring out the Input Tax Credit (ITC) that can be used. So, not all of the money paid in taxes can be claimed.

Reversal of Input Tax Credit (ITC)

As the name suggests, there are times when the Input Tax Credit (ITC) that was previously claimed needs to be taken back. The reversal could be because the original claim was for too much credit, or because the capital goods were used for something other than business, the goods were lost or given away as free samples, etc. Some of these things could also be interesting, along with reversal.

From a reporting point of view, reversing an ITC means that the amount is added to the taxpayer’s output tax liability. Almost all cases of Input Tax Credit (ITC) reversal have to do with the taxpayer’s own paperwork and processes, which cannot be seen from the GSTR 2A data alone.

So, to make the process of reversing easier, the accounting systems should have the right checks and balances. Some of these checks include highlighting events or setting up alerts in the system for events that need more action for Input Tax Credit (ITC) computation and reversal.

How to claim ITC? – Availing of maximum ITC

The main goal of every taxpayer is to get the most ITC possible by following all of the rules and conditions of GST law. The success of this goal depends on the internal processes and tools used, as well as some external factors like vendor compliance. Read the steps below to learn how to claim ITC and how to get the most out of it…

1. Defining Internal Processes and Controls:

ITC calculations need not only information from the GST system (GSTR2A), but also information from accounting or ERP systems. So, there are many steps and events that taxpayers need to keep track of on their own, which can help them figure out ITC in a timely and correct way. This includes finding checkpoints like when the goods are received and/or when the last batch of goods is received and making sure that they are recorded on time.

A Negative List of Goods and Services for ITC claim can be found with the help of a proper Product and Service Master that is kept at the accounting level. Also, keeping track of information at the invoice level, such as the type of goods (input or capital), the reason for the transaction (business, personal, etc.), or a way to find events related to the reversal of ITC, can help avoid problems in the future. Errors can also be cut down on by automating data entry.

2. Robust GST Reconciliation:

The data that vendors send to the government is what the government uses to keep an eye on ITC claims made by recipients. So, it is very important to compare and match the internal (procurement receipts) and external (GSTR-2A download from the GST system) versions of the same data. This is the point of GST Reconciliation.

By putting together the results of the reconciliation and the extra information from internal systems, taxpayers can get deep insights and plans for how to use their ITC to its fullest. Even though the invoices that match are a clear sign that ITC is available, the invoices that don’t match or are missing need to be looked into more to see if there is any way to turn them into ITC that can be claimed.

3. Comprehensive Reports

After reconciliation, the results need to be put together in a way that makes sense so that you can really look into the transactions that need your attention. To reach the goal of maximising ITC, there is a pressing need to get insights and reports from GST reconciliation results. These can be used to look at the same data from different angles. Also, since a business entity could have many GST registrations, it would be nice to be able to get a group-level view with the option to drill down to the GSTIN level. With reconciliation, taxpayers are better able to know for sure which ITCs are available. It also helps to keep track of invoices that need more work, like following up with vendors or being claimed provisionally so that there aren’t any double claims in the future, etc.

4. Keeping a check on Vendor Compliance:

As the government tightens its rules on GST fraud, vendors who don’t follow the rules hurt your ITC claims. You need to know if the GSTR 1 and GSTR-3B returns have been filed for all of your vendors in the purchaser register. Not only should you know the filing status of GSTR 1, but you should also know how often it is filed.

The advent of GSTR 2B

Through GSTR 2A, the government has been putting out regular advisories and making the invoices that vendors have uploaded available almost in real time. Also, thanks to technological advances like E-invoicing, the GST returns and auto-drafted statements now include more information, such as the IRN (Invoice Registration Number), the filing status of vendors, and much more.

In July 2020, the government also made GSTR 2B available.

GSTR 2B is an auto-written statement that doesn’t change. GSTR 2A is updated every time a vendor uploads an invoice, but GSTR 2B is a static statement that is only made after the due date for GSTR1/IFF returns. GSTR 2B only has invoices from vendors who have filed their returns. This is different from GSTR 2A, where vendors’ invoices show up as soon as they are saved.

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