Goods and Services TaxAdvocate Tanwar

Introduction

Input Tax Credit (ITC) is a core feature of the Goods and Services Tax (GST) system, which allows businesses to claim credit for the taxes they have paid on their inputs—goods or services purchased for further business use. ITC prevents the cascading effect of taxes (tax on tax), ensuring that the tax burden is not passed down the supply chain and ultimately to the consumer. This article aims to provide a comprehensive understanding of ITC under GST, including the eligibility criteria, provisions, legal cases, and challenges businesses may face while claiming ITC.

What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) allows a taxpayer to reduce the tax they have already paid on inputs (goods or services used to make products or provide services) from the tax they owe on their outputs (goods or services sold). The mechanism of ITC is designed to avoid the cascading effect of taxes, ensuring that businesses are only taxed on the value they add to goods and services, not on the total value of the transaction.

Example of ITC

Imagine a manufacturer who purchases raw materials (input) for ₹1,000 and pays a GST of ₹180 (18%). When the manufacturer sells the finished product, the sale price is ₹2,000, and GST on the sale is ₹360 (18%). The manufacturer can claim an input tax credit of ₹180 on the raw material purchase and offset this amount from the GST payable on the sale of finished goods. Hence, the effective tax payable on the sale is ₹180 (₹360 – ₹180).

Eligibility Criteria for Claiming ITC

Section 16 outlines the eligibility requirements and the conditions for claiming ITC, including possession of a valid invoice and receipt of goods or services. A registered taxpayer is eligible to claim ITC under the following conditions:

  1. GST Registration: Only businesses that are registered under GST are eligible to claim ITC. Registration under GST is mandatory for businesses whose turnover exceeds the prescribed threshold limit.
  2. Taxable Goods/Services: The goods or services on which ITC is claimed should be used for business purposes. Goods or services used for personal consumption are not eligible for ITC.
  3. Valid Tax Invoice or Debit Note: ITC can only be claimed when the taxpayer has a valid tax invoice, debit note, or any other prescribed document from a registered supplier, containing specific details like the GSTIN of the supplier and recipient, description of the goods or services, tax amount, etc.
  4. Receipt of Goods/Services: ITC can only be claimed when the goods or services are received by the taxpayer. ITC cannot be claimed if the goods are not delivered or the services are not rendered.
  5. Supplier’s Payment of Taxes: The supplier must have deposited the tax collected from the taxpayer to the government for the recipient to claim ITC. If the supplier fails to remit the tax, the recipient cannot claim ITC, even if the invoice has been issued.
  6. Filing of GST Returns: The recipient must file GST returns, including GSTR-3B, to claim ITC. ITC is linked to the correct filing of returns.

How to Claim ITC

Section 18 covers the rules for claiming ITC on goods and services that were purchased before GST implementation and on which tax had already been paid under the previous tax regimes (like VAT, excise duty, etc.). To claim ITC, taxpayers must follow a systematic process:

  1. Receiving Goods or Services: The first step is the receipt of goods or services, followed by ensuring the taxpayer has a valid tax invoice or debit note from the supplier.
  2. Filing GST Returns: The taxpayer must file GSTR-3B and report the input tax credit available. The credit can be claimed based on the information furnished in the return.
  3. Reconciliation of ITC: The details of the ITC claimed by the recipient will be automatically updated in the GSTR-2A form, which is a system-generated document reflecting all purchases from registered suppliers. Taxpayers must reconcile this data and ensure it matches with the supplier’s GSTR-1 filing. Rule 36(4) of the GST Rules governs the reconciliation of ITC.
  4. Utilization of ITC: Once the ITC is claimed, it can be utilized to offset the output tax liability. The credit is applied to reduce the amount payable as CGST, SGST, or IGST, based on the available balance in each category. Section 49 deals with the priority of using ITC for payment of CGST, SGST, and IGST, and sets the order in which the credits can be utilized.

The court in the case CCE v. Coca-Cola India Ltd. (2009) held that if the tax on inputs is not paid, ITC cannot be claimed, even if the goods have been used for business purposes.  Whereas, the Supreme Court in the case State of Punjab v. M/s. Tata Motors Ltd. (2005) ruled that credit for taxes paid on capital goods could be claimed even if those goods were used to produce goods for future sale.

Blocked Credits: Items Where ITC Cannot Be Claimed

The GST Act prohibits claiming ITC on certain goods and services, known as “blocked credits. Section 17 deals with the apportionment of ITC in cases where the goods or services are used partly for business and partly for personal use. These include:

  1. Motor Vehicles and Conveyances: ITC cannot be claimed on the purchase of motor vehicles unless they are used for specific business purposes such as transportation of goods or passengers.
  2. Food, Beverages, and Outdoor Catering: ITC on food and beverages, club memberships, and health services is blocked unless they are used for business purposes (like employee welfare or business conferences).
  3. Works Contract: ITC is not allowed on works contract services for the construction of immovable property (except when the property is used for business purposes).
  4. Personal Use: ITC cannot be claimed on goods and services that are used for personal consumption.
  5. Land and Buildings: ITC on land and buildings is blocked, with the exception of services related to the construction of immovable property used for business purposes.

Challenges and Issues in Claiming ITC

Despite the benefits of ITC, businesses face several challenges while claiming it:

  1. Mismatched Invoices: A major issue faced by businesses is the mismatch between the invoices uploaded by suppliers and the data reflected in the recipient’s GSTR-2A. If the supplier fails to upload correct information or delays the submission, the recipient may be unable to claim ITC. Sections 42 and 43 deal with the matching of purchase and sale invoices, the reversal of ITC in case of mismatches, and the procedure for reclaiming ITC after correction of errors.
  2. Complex Reconciliation: The reconciliation process of GSTR-1, GSTR-2A, and GSTR-3B filings can be cumbersome, especially for businesses with a large number of suppliers. Discrepancies in matching invoices lead to errors in claiming ITC.
  3. Blocked Credits: Understanding and complying with the provisions of blocked credits can be difficult, as businesses may inadvertently claim credits on ineligible goods or services, leading to penalties.
  4. Changes in ITC Provisions: The frequent amendments to the ITC provisions, such as restrictions on ITC claims or new rules for e-commerce businesses, create uncertainty for businesses and require constant adaptation to the regulatory landscape.

Conclusion

Input Tax Credit (ITC) under GST helps businesses minimize tax burdens by allowing them to claim credits for taxes paid on inputs, reducing cascading taxes and making goods and services more affordable. However, businesses must comply with the GST Act’s requirements, maintain proper records, ensure invoice accuracy, and follow the matching provisions to avoid penalties and maximize tax credits. By understanding and applying ITC correctly, businesses can enhance efficiency, reduce tax liabilities, and ensure GST compliance.

Contributed By – KAJAL RAWAT