Input Tax Credit (ITC) is a significant feature of the Goods and Services Tax (GST) regime that has simplified the taxation process and eliminated the cascading effect of taxes. The ITC is a credit that a business can claim for the taxes paid on the purchase of goods and services that are used for business purposes. In other words, when a business that has GST registration purchases raw materials, goods or services, and pays GST on them, they can claim a credit for the GST paid. This credit can be used to offset the GST liability on the supplies made by the business.
Eligibility for ITC
To claim ITC, the recipient of goods or services should be registered under GST and file GST returns on time. Moreover, the goods and services should be used for business purposes only. If the goods and services are used for personal use or exempt supplies, ITC cannot be claimed. Additionally, the supplier of goods and services should have paid the tax to the government, and the recipient should have received the goods or services.
Conditions for claiming Input Tax Credit
To claim Input Tax Credit, the following conditions should be satisfied:
- The recipient should possess a tax invoice or debit note issued by the supplier. The tax invoice should include the name, address, and GSTIN of the supplier and recipient, description and quantity of goods or services, tax amount, and the date of supply.
- The recipient should receive the goods or services.
- The recipient should pay the supplier for the goods or services within 180 days from the date of the invoice.
- The supplier should have filed GST returns and paid GST to the government.
- The recipient should have furnished GST returns.
How to claim Input Tax Credit?
To claim Input Tax Credit, the recipient should show the details of eligible ITC in the GSTR-2 return. Once the recipient submits the GSTR-2 return, the ITC will be credited to the electronic credit ledger of the recipient. The recipient can use the ITC available in the electronic credit ledger to pay the GST liability on the outward supplies made by the business.
Blocked Credit under GST
Certain conditions are where Input Tax Credit cannot be claimed. Such ITC is called blocked credit. The following are the instances where ITC is blocked:
- ITC cannot be claimed on the purchase of goods or services used for personal purposes or non-business purposes.
- ITC cannot be claimed on goods or services used to manufacture exempted supplies.
- ITC cannot be claimed on goods or services used for the construction of immovable property except for plant and machinery.
- ITC cannot be claimed on goods or services used for the composition scheme.
- ITC cannot be claimed on goods or services used for making payments of late fees or penalties.
- ITC cannot be claimed on motor vehicles and other conveyances used for personal purposes or non-business purposes.
Benefits of Input Tax Credit
The Input Tax Credit has several benefits, some of which are mentioned below:
Elimination of Cascading Effect
Input Tax Credit eliminates the cascading effect of taxes, where taxes are paid on taxes. In the pre-GST era, taxes were levied at every stage of the supply chain, resulting in higher prices for consumers. With ITC, the tax paid on inputs can be offset against the tax liability on outputs, reducing the tax burden.
Reduction in Prices
The Input Tax Credit has reduced the prices of goods and services as the GST paid on inputs is creditable against the GST liability on outputs. Consequently, the cost of production has decreased, and businesses can offer competitive prices to consumers.
Ease of Compliance
The Input Tax Credit has made compliance easier for businesses as it has reduced the number of taxes to be paid. In the pre-GST era, businesses had to pay several indirect taxes, such as excise duty, service tax, and VAT. With GST, businesses need to pay only one tax, and the ITC mechanism ensures that taxes paid on inputs are available for offsetting the tax liability on outputs.
Boost to Businesses
Input Tax Credit has given a boost to businesses as they can claim credit for the GST paid on inputs. This has improved the cash flow of businesses, as they can use the credit to pay off their tax liability. Moreover, businesses can claim credit for the GST paid on capital goods, which was not available in the pre-GST era.
Reduction in Tax Evasion
The Input Tax Credit has reduced the scope for tax evasion as the credit is available only when the supplier has paid the tax to the government. The recipient can claim credit only when the supplier has filed GST returns and paid GST to the government. This has made the tax system more transparent and reduced the scope for tax evasion.
GST Registration for Claiming Input Tax Credit
GST Registration is mandatory to claim Input Tax Credit under GST. Any business with an annual turnover of more than Rs. 20 lakhs (Rs. 10 lakhs for northeastern states) is required to register under GST. Moreover, businesses that are involved in inter-state transactions or e-commerce activities are required to register under GST, irrespective of their turnover.
To register under GST, businesses are required to visit the GST portal and submit the required documents. Once the application is approved, the business will receive a GSTIN, which is a 15-digit unique identification number. The business can use the GSTIN to file GST returns and claim Input Tax Credit.
Input Tax Credit or GST tax credit is a crucial feature of the GST regime that has simplified the taxation process and eliminated the cascading effect of taxes. The ITC mechanism ensures that taxes paid on inputs are available for offsetting the tax liability on outputs, reducing the tax burden on businesses. Moreover, ITC has several benefits, such as the elimination of the cascading effect, reduction in prices, ease of compliance, boost to businesses, and reduction in tax evasion. However, to claim Input Tax Credit, businesses are required to register under GST and comply with the conditions specified under the GST law.
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