GST Input Tax Credit

GST Input Tax credit is the mechanism in which Input tax on purchases need to be set off from output tax on sale. GST Act 2017 contain certain provisions regarding GST Input Tax Credit Allowance or Dis-Allowance.

Start With Confidence
CA/CS Assisted | 4.8/5 Rating

Comprehensive Guide on GST Input Tax Credit (ITC) Compliance in India

1. Introduction to GST Input Tax Credit (ITC)

GST Input Tax Credit (ITC) is a fundamental concept in the Goods and Services Tax (GST) system that eliminates the cascading effect of taxation. ITC allows businesses to reduce the tax paid on inputs (purchases) from the tax payable on output (sales). This mechanism ensures that only the value addition at each stage of the supply chain is taxed.

2. Eligibility for ITC

To claim ITC, a registered taxpayer must meet the following conditions:

Must be a registered taxpayer under GST (except for composition scheme taxpayers).
Goods or services should be used for business purposes.
Possession of a valid tax invoice or debit note issued by a registered supplier.
The supplier has paid tax to the government.
The recipient has received the goods or services.
The recipient has filed the relevant GST return.

3. Documents Required to Claim ITC

The following documents are essential for availing ITC:

Tax Invoice issued by the supplier.
Debit Note issued by the supplier.
Bill of Entry for import transactions.
Invoice issued by recipient in case of Reverse Charge Mechanism (RCM).
Document issued by Input Service Distributor (ISD).
Revised invoices issued under GST provisions.

4. Conditions for Claiming ITC

If the goods are received in multiple lots, ITC can be claimed only after receiving the final lot.
ITC should be availed within the prescribed time limit, generally by the due date of filing the annual return for the relevant financial year.
The recipient must pay the invoice amount, including tax, to the supplier within 180 days; otherwise, the ITC availed must be reversed.
In case of part-payment, ITC is available proportionately, and the balance ITC must be reversed.
Once the payment is made after 180 days, ITC can be reclaimed.

5. Blocked Credits Under Section 17(5) of CGST Act

ITC cannot be claimed on certain goods and services, commonly referred to as “Blocked Credits”:

Motor vehicles and conveyances (except for specific business uses like transportation, leasing, and training).
Food, beverages, outdoor catering, beauty treatments, health services, and cosmetic surgeries.
Club memberships, health, and fitness center services.
Rent-a-cab services, life, and health insurance (unless required by law).
Travel benefits extended to employees for vacations.
Works contract services for constructing immovable property (except where used for further supply of work contract services).
Goods and services used for personal consumption.
Goods lost, stolen, destroyed, written off, or disposed of as free samples or gifts.
ITC on tax paid under the composition scheme.

6. Reconciliation of ITC with GSTR-2A and GSTR-2B

ITC claimed by the taxpayer should match with the supplier’s reported details in:

GSTR-2A: A dynamic statement reflecting invoices uploaded by suppliers.
GSTR-2B: A static statement generated on the 12th of every month, listing eligible ITC for the recipient.

Regular reconciliation of ITC with these forms helps prevent discrepancies, notices from tax authorities, and wrongful claims.

7. ITC in Case of Multiple State GST Registrations

Businesses with operations in multiple states must register separately for GST in each state. ITC must be:

Claimed under the respective GSTIN where goods or services are received.
Properly segregated for each state-wise registration.
Mapped with the state-wise financial statements and reported accordingly in GSTR-9 (Annual Return).
Transferred via cross-charge or ISD mechanism if centrally procured services are used across multiple states.

8. ITC Reversal and Re-Claiming

There are instances where ITC availed must be reversed:

Non-payment to supplier within 180 days
Use of inputs for exempt or non-business activities
Block credits under Section 17(5)
ITC claimed on invoices not reflecting in GSTR-2B

Once the conditions are met (e.g., payment to the supplier after 180 days), ITC can be reclaimed in subsequent returns.

9. Time Limits for Claiming ITC

ITC must be availed by the earlier of:

The due date of filing GSTR-3B for September following the financial year.
The due date of filing the annual return (GSTR-9).

10. Compliance Best Practices

Regular reconciliation of purchase invoices with GSTR-2A/2B.
Timely payment of invoices to avoid ITC reversal.
Keeping proper documentation for ITC claims.
Ensuring suppliers file their GST returns to prevent ITC mismatch.

11. Common Mistakes to Avoid

Claiming ITC on blocked credits.
Delayed payment to suppliers resulting in ITC reversal.
Not reconciling ITC with GSTR-2B.
Claiming ITC on invoices of different states.
Missing the ITC claim deadline.

12. Conclusion

GST ITC is a crucial component of the GST framework, ensuring seamless input tax credit flow throughout the supply chain. Proper compliance and reconciliation can significantly impact the financial health of a business. Keeping up with GST regulations, maintaining accurate records, and leveraging automation tools can help businesses maximize ITC claims while staying compliant.

For professional assistance, reach out to us on email: info@returnfilings.com or on whatsapp: https://wa.me/919910123091.

13. Additional Resources

For further reading, explore the following topics:

Understanding GST E-Invoicing and Its Compliance
GST Annual Return Filing: A Complete Guide
GST E-Way Bill: Applicability and Compliance
GST e-invoicing: Guide on GST e-invoicing applicability and rules.

Frequently asked Questions (FAQs) on GST Input Tax Credit compliances

General Information about ITC

1. What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) is a mechanism under GST that allows a registered taxpayer to deduct the GST paid on their inputs (purchases) from the GST payable on their output supplies (sales). It’s designed to avoid the cascading effect of taxes and ensure a smooth flow of credit.

2. Why is ITC important?

ITC is important because it: Reduces the tax burden on businesses. Prevents the cascading effect of taxes. Makes businesses more competitive. Promotes efficient tax compliance.

3. Who can claim ITC?

Any registered GST taxpayer can claim ITC on eligible inputs used in their business.

4. What are the conditions for claiming ITC?

The key conditions for claiming ITC are: The taxpayer must be a registered GST taxpayer. The inputs must be used for business purposes. The taxpayer must have a valid tax invoice. The supplier must have uploaded the invoice to the GST portal (in most cases). The recipient must have received the goods or services. The ITC claimed must be reflected in the recipient’s GSTR-2B (or earlier, GSTR-2A, now largely replaced by 2B).

Eligible and Ineligible ITC

5. What inputs are eligible for ITC?

Generally, ITC is available on all inputs used in the course or furtherance of business, including raw materials, consumables, capital goods, and input services.

6. What inputs are ineligible for ITC?

Certain inputs are ineligible for ITC, including: Inputs used for personal consumption. Inputs used in making exempt supplies. Certain specific goods/services as notified by the government (e.g., motor vehicles and conveyances in certain cases, works contract services in certain cases, etc. – check the latest notifications). Composition scheme taxpayers cannot claim ITC.

Claiming ITC

7. How do I claim ITC?

ITC is claimed in the GST return (GSTR-3B). The invoices on which ITC is claimed are now largely auto-populated in GSTR-2B.

8. What is the process for claiming ITC?

The process generally involves: Ensuring that the supplier has uploaded the invoice. Checking the invoice details in GSTR-2B. Reporting the eligible ITC in GSTR-3B.

9. What is GSTR-2B?

GSTR-2B is an auto-populated statement of inward supplies for the recipient taxpayer. It shows the ITC that is available for the recipient to claim. It is generated monthly and is a key document for ITC reconciliation.

10. What is the time limit for claiming ITC?

ITC must be claimed within a specified time limit, usually before the due date for filing the return for the month/period in which the invoice was issued or within a specified time from the date of the invoice (check the latest notifications as this time limit is subject to change).

ITC Matching and Reconciliation

11. What is ITC matching?

ITC matching is the process of comparing the invoice details uploaded by the supplier with the details reported by the recipient to ensure that the ITC claimed is valid.

12. Why is ITC reconciliation important?

ITC reconciliation is essential to: Identify any discrepancies between supplier and recipient data. Ensure that only eligible ITC is claimed. Avoid any issues with the tax authorities.

13. What happens if there are mismatches in ITC?

Mismatches can lead to delays in ITC claims or even rejection of the claims. It’s crucial to reconcile data and resolve mismatches promptly.

Other Considerations

14. What happens if I claim ineligible ITC?

Claiming ineligible ITC can lead to penalties and interest.

15. Can I claim ITC on inputs used to manufacture goods that are exported?

Yes, you can claim ITC on inputs used to manufacture goods that are exported. Exports are zero-rated supplies, and ITC is generally refundable in such cases.

16. What is the role of a professional in ITC compliance?

A professional can assist with ITC reconciliation, ensuring compliance with the rules, and advising on complex ITC-related issues.

Indian Owner

Foreign Owner

Special Entities

Government Registrations

Return & Compliances

Conversion of Entities

Change Services

Closure of Entities