GST is set to revolutionize the world of Indian Indirect Taxation and INPUT TAX CREDIT is one of the key features which will help in eliminating the cascading effect of indirect taxes. Let us understand about the ITC under GST.
What is Input Tax Credit ?
When you buy raw materials as inputs to manufacture and further sell your products, you have to pay tax on such inputs. So, when you are required to pay tax on finished output, you can reduce the tax you have already paid and you just pay the remaining tax liability. Now let’s discuss this in details for clear understanding.
Eligibility Criteria
Every person registered under GST shall be entitled to take credit of input tax charged on any inward supply of goods or services or both which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
The ITC shall be allowed on Inter-state as well as on Intra state supplies.
Input Tax Credit to be utilized in the following sequence:-

  • IGST
  1. IGST
  2. CGST
  3. SGST
  • CGST
  1. CGST
  2. IGST
  • SGST
  1. SGST
  2. IGST

 Please Note:- The credit of CGST cannot be utilized to set off liability against SGST and vice versa.
Conditions for taking Input Tax Credit

  • Registered person should be in possession of a tax invoice issued by a supplier.
  • The registered person should have received such goods or services or both.
  • Tax in respect of such supply has been actually paid to the government either in cash or by utilization of credit.
  • He must have furnished the return under GST.

Note:–  A registered person shall not be eligible to incorporate input tax credit in GST Return in respect of inward supply of goods or services after the expiry of 1 year from the date of tax invoice relating to such inward supply.
Availability of Input Tax Credit on the basis of use

  • Business Purposes – Available
  • Other Purposes – Not Available
  • Taxable Supplies( including zero rated supplies) – Available
  • Non-Taxable supplies – Not Available

Input Tax Credit in case of Capital Goods
If depreciation has been claimed on tax component of the cost of capital goods then INPUT TAX CREDIT shall not be available.
Example: – If Mr. A (From Mumbai) has purchased Plant & Machinery for Rs. 10,00,000 from a Mr. B (From Tamil Nadu).
It is an inter-state supply with Tax Rate of 12%
Cost of Asset           Rs. 10,00,000
Add: IGST @12%    Rs. 1,20,000
                                  Rs. 11,20,000
Now there are two options available for us

  1. If depreciation is charged on Rs. 1000000 – Input Tax Credit of Rs.120000 is available.
  2. If depreciation is charged on Rs. 1120000 – Input Tax Credit of Rs.120000 is not available.

Availability of credit in certain circumstances

  1. Person who has applied for registration within 30 Days from the date on which he become liable for registration under GST.

He shall be eligible to take credit of input tax in respect of inputs in stock held on the day immediately preceding the date from which he becomes liable to pay tax.
Please Note: Credit on pre-registration stock would not be available if registration has not been obtained within 30 days from the date on which a person becomes liable for registration.

  1. Person who has applied for voluntary registration shall be entitled to take credit on inputs lying in stock held on the day immediately preceding the date of grant of registration.

In case of Inputs and Capital Goods sent on Job Work
Principal shall be entitled to take credit on inputs and capital goods sent for job work from his place of business as well as when they are directly sent to a job worker without being brought to his place of business.
But if inputs are not received back by the principal within 1 year of being sent out, it shall be deemed that such inputs have been supplied by the principal to the job worker. In respect of capital goods, time period shall be 3 years.
Input tax Credit shall not be available in respect of the following:

  • Motor vehicles and other conveyances except when they are used for
  • Further supply of such vehicles or conveyances,
  • Transportation of goods or passengers,
  • Imparting training on driving, flying, navigating such vehicles or conveyances.
  • Supply of goods or services being:
  • Food and Beverages
  • Outdoor catering
  • Beauty Treatment
  • Health services
  • Cosmetic and Plastic surgery

Shall be allowed ONLY if goods or services of a particular category are used towards making  taxable outwards supplies of the same category.

  • Membership of a club, health and fitness centre
  • Travel benefits extended to employees
  • Rent-a-cab, life insurance and health insurance except where
  • Services are notified as obligatory for an employer to be provided to an employee or
  • Such inward supply of a particular category is used by a registered person for making an outward taxable supply of the same category.
  • Construction of Immovable property other than Plant & Machinery
  • Works Contract Services except where it is an input service for further supply of works contract service.
  • Goods or services received by a taxable person for construction of immovable property even when used in course or furtherance of business.

By CA Anu Mittal

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