Input Tax Credit under GST is essential for businesses to maintain smooth cashflow in business taxes.
ITC under GST ensures that you do not have to pay repeated taxes. You can say that ITC is one of the most salient tools of GST that eliminates the cascading or tax-on-tax effect of the VAT regime.
From a Business perspective, ITC will help you to balance the flow of taxes in a more systematic way.
Hence it becomes essential to claim the right amount of ITC in the most righteous manner, without making any mistakes.
So we have stated a few key points that you must note while & before claiming Input Tax Credit under GST, to claim the most precise amount of credits for your business.
ITC under GST- Detailed Working Explained
So what is Input Tax Credit under GST?
When you create or manufacture a good, you use raw materials, human resources, machinery, etc. on which you pay taxes as a buyer of such goods & services.
But you also pay taxes as a seller on the finished product while selling them.
ITC ensures that you do not have to pay taxes on finished products that you already paid as an input in the making of that product.
You can claim the credit of the Input Tax and adjust it with your outward tax liability.
Here’s how Input Tax Credit works-
Mr. A bought raw material from Mr. B for making a finished product to sell & paid Rs. 5000 as GST in the tax period-March.
Mr. A then finished the manufacturing of the product & was liable for a tax of Rs. 8000 on the finished goods, in the same tax period.
As Mr. B filed his GSTR-1 (Sales) for the tax period March, Mr. A’s GSTR-2B got auto-populated, containing the detail of the transactions as his inward supply.
Based on this information on form GSTR-2B, Mr. A can claim the credit of Rs. 5000 that he already paid & adjust the same with his outward tax liability of Rs. 8000 via his form GSTR-3B.
Upon this, Mr. A will only have to pay Rs. 3000 as his GST on that particular transaction.
Note- There is a new 10% Rule as per which, if Mr. B does not disclose this transaction in his GSTR-1, then Mr. B can only claim 10% of the total amount (Rs. 5000) as his ITC.
So, as per the 10% rule of missing invoices, Mr. A will only be eligible for ITC worth Rs. 500.
Time Limit to Claim your Input Tax Credit
As per Section 16(4) of the CGST Act 2017, you can claim any pending ITCs for any particular month, till the September of the subsequent year or while GST Return Filing (annual return GSTR-9)
Any pending ITC post this period will collapse & you will not be allowed to utilize it in any way.
However, it is recommended to claim the ITC in real-time that it is to claim ITC on a monthly basis.
This will ease up accounting for your accountants as well as will make the annual return filing systematic & more precise.
The ITC claiming time limit must be kept in mind by the accountants especially while dealing with complex transactions such as Imports.
List of Conditions to Claim ITC under GST
It may look like claiming ITC is simple but it is, however, ironic that ITC is one of the most complex provisions of GST that has many rules & conditions attached to it.
Many conditions & rules are to be considered by the accountants very deeply as these may change in the practical application & are non-generic.
One condition may affect or nullify the other depending and varying as per the case.
However, we have tried to simplify these conditions for you to understand better-
- 180 Days Rule- The buyer of the goods who is claiming the ITC must have made the complete payment within 180 days from the date of supply in order to claim ITC.
- Time Limit of claiming ITC- ITC can be claimed by the taxpayer EITHER till the GSTR filing of September of the subsequent year OR in the annual return filing of form GSTR-9
- Possession of Documents- The taxpayer who is willing to take ITC must posses the invoices & other supporting documents with him, such as Credit & Debit Notes.
- Receiving of Goods- The receiver of the goods & services must have received the same within 180 days from the date of the invoice.
- Provisional ITC under GST- As per the 10% Provisional ITC rule, if your supplier fails to furnish the invoices in their GSTR-1 & it does not appear in your GSTR-2A you will not be able to claim full ITC on such transactions. Instead, you will be eligible only for an additional 10% of the actual ITC mentioned in your GSTR-2A.
In this case, Businesses must use GSTR 2A Reconciliation Software for reconciling their data.
- ITC on Capital Goods- You cannot claim ITC on the capital goods if you have already claimed depreciation on the same. You can opt for either of the two but not both.
- Goods Received in Installments- In case you are receiving the goods in lots or installments, then you will only be eligible for ITC when the last & final installment is received by you.
- ITC on Debit Notes- Customers can claim ITC based on Debit Notes created against an Invoice.
- ITC, in case of Credit Note Generation- Using a Credit Note, the supplier can reduce their tax liabilities. In this case, the recipient will have to reverse the ITC that they have claimed as Credit Notes nullify the transactions.
- ITC on Import of Goods- While claiming ITC on imports, you must furnish- The bill of entry & The IGST payment challan.
- Deposition of Taxes to the government- You must ensure that the GST that you have paid to the supplier reaches to the Government vis GST returns. If the tax doesn’t reach the Government, you may not be able to claim full ITC of the same.
- Common Credit of ITC under GST- Common Credits can only be claimed in the following 2 cases-
- Effecting exempted and taxable supplies
- Business and non-business related activities
ITC claiming & management can be tedious task require more manual efforts & time.
However, there are alternative solutions to this problem, such as taking the help of Government-authorized GSPs.
One such trusted GSP is GSTHero that enables an Advance GSTR 2A Reconciliation Tool that is stacked with features to make ITC reconciliation simpler & lesser time-consuming.
GSTHero Automate the process to ease your work & make the reconciliation process accurate so can claim 100% Eligible ITC without any friction.
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About the Author– GSTHero– Making GST Simple! GSTHero is the best GST filing, e-Way Bill Generation & E Invoicing Software in India. GSTHero is a government authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9 and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation& report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero. GSTHero ERP Plugins provide 1 Click e-Way Bill & E-Invoice, Generation, Operation & Printing from your own ERP like Tally, SAP, Marg, Busy, Microsoft Dynamics, Oracle & others itself with high data security