Assets Taxable Under Wealth Tax in India

Input Tax Credit (ITC) under GST

Input Tax Credit under GST

Input Tax Credit (ITC) is a fundamental feature of the Goods and Services Tax (GST) in India, allowing businesses to reduce their tax liability by claiming credit on the GST they have paid on inputs used for business purposes. By preventing the cascading effect of taxes, ITC makes the tax system more efficient and cost-effective for businesses.

What is Input Tax Credit (ITC)?

ITC enables businesses to claim credit for the tax they have paid on inputs (goods or services used to produce other goods or services) against their output tax liability. In simple terms, businesses can deduct the GST they’ve paid on their purchases from the GST they charge on their sales, thereby lowering the overall tax burden.

For example, if a business owes ₹1,000 as output GST on the sale of its product but has paid ₹600 as input GST on the raw materials, it can claim an ITC of ₹600 and pay only ₹400 as the net GST liability.

Eligibility for ITC

To claim ITC, businesses must meet specific eligibility criteria under the GST law:

1. Possession of a Tax Invoice: The business must hold a valid tax invoice or debit note issued by the registered supplier of the goods or services.
2. Receipt of Goods or Services: ITC can only be claimed once the goods or services have been actually received by the business.
3. Supplier’s Tax Payment: The supplier should have paid the tax to the government. This is tracked through the GST returns filed by the supplier.
4. Filing of GST Returns: The business must file its GST returns, especially Form GSTR-3B, which includes details of input and output taxes, to be eligible for ITC.
5. Usage for Business Purposes: ITC can be claimed only on goods and services used for business purposes, and not for personal use.
6. Payment within 180 Days: Payment to the supplier must be made within 180 days of the invoice date. If not, the ITC claimed earlier must be reversed.

Ineligible ITC Expenses

Certain items are specifically disallowed from ITC claims under the GST law, such as:

• Motor vehicles for personal use
• Membership of clubs, health, and fitness centers
• Personal expenses
• Goods and services used for construction of immovable property (other than plant and machinery)
• Travel benefits for employees (except where obligatory under law)

How to Claim ITC?

The process to claim ITC involves these steps:

1. Self-Assessment: A business must identify and assess the eligible ITC for each purchase.
2. Matching with GSTR-2B: The business must match invoices with the auto-populated Form GSTR-2B, which provides details of inward supplies and available ITC.
3. Filing of GSTR-3B: The business needs to file Form GSTR-3B monthly, which is the self-declaration return for reporting output and input taxes.
4. Utilization: Once filed, the eligible ITC can be utilized to offset the output GST liability.

Reversal of ITC

Businesses may have to reverse ITC under certain conditions, such as:

• Non-payment to the supplier within 180 days
• Goods lost, stolen, destroyed, or given as free samples
• Use for exempted or personal purposes

Benefits of ITC under GST

1. Reduced Tax Burden: ITC lowers the effective tax cost by allowing credit on input taxes, reducing double taxation.
2. Improved Cash Flow: Businesses pay tax only on the value addition, as the tax paid on purchases is claimed as credit.
3. Streamlined Compliance: The GST system requires transparent tracking of tax payments through returns, simplifying the process of tax compliance.
4. Boost to Competitiveness: Lower costs and reduced tax burden help businesses price their products more competitively.

Conclusion

ITC under GST aims to create a seamless tax credit chain from the supplier to the end customer, reducing tax costs and enhancing transparency in the tax structure. Proper compliance with ITC provisions enables businesses to maximize credit and stay tax-compliant under GST law. However, businesses need to be cautious about meeting eligibility requirements and keeping accurate records, as improper claims may lead to reversals and penalties.