Goods and Services Tax (GST) has significantly transformed the Indian taxation landscape, with Input Tax Credit (ITC) emerging as one of its most crucial components. Understanding ITC can help businesses reduce costs and improve profitability. In this detailed guide, we will explain ITC under GST, its eligibility, benefits, and the steps to claim it effectively.
Input Tax Credit: Meaning
Input Tax Credit (ITC) is a mechanism that allows businesses to reduce their tax liability by claiming credit for the taxes paid on inputs used in the production of goods or services. In simpler terms, if you are a registered GST taxpayer, you can deduct the GST paid on purchases from the GST collected on sales.
Input Tax Credit: Example
Suppose a manufacturer pays INR 50,000 as GST on raw materials and collects INR 80,000 as GST from customers. The ITC of INR 50,000 can be claimed, reducing the GST liability to INR 30,000 (80,000 – 50,000).
Eligibility Criteria for Claiming ITC
To claim Input Tax Credit under GST, businesses must meet the following conditions:
- GST Registration: The taxpayer must be registered under GST.
- Valid Tax Invoice: Possess a valid tax invoice or debit note issued by a registered supplier.
- Receipt of Goods or Services: Goods or services must be received.
- Tax Payment by Supplier: The supplier must have paid the GST to the government.
- GST Return Filing: The claimant must have filed the relevant GST returns.
What is input tax credit on capital goods created under?
Input Tax Credit (ITC) on capital goods is created under the Goods and Services Tax (GST) framework. Capital goods are assets used in the production of goods or services, such as machinery, equipment, and tools. Under GST, businesses can claim ITC on the GST paid for purchasing these capital goods, provided they are used for business purposes and not for personal or exempt supplies.
ITC on capital goods is governed by Section 16 of the CGST Act, 2017. The entire ITC amount can typically be claimed in the same financial year, provided the asset is used for taxable supplies. Capital goods should be reported correctly in GSTR-3B and GSTR-2A/2B for reconciliation.
ITC On Real Estate Sector
The highlight of the GST regime for the Real estate sector is the availability of Input Tax Credits (ITC) paid on inputs, capital goods and input services. Under the erstwhile regime, developers would be liable to pay a multitude of taxes such as VAT, Central Excise, Entry Tax, LBT, Octroi, Service Tax, etc., the credits of which were not freely available against the output tax liability. However, the GST regime provides for ITC eligibility on construction and other services procured, thereby eliminating the inefficiency ushered in by the cascading effect of taxes.
From a real estate developer’s standpoint, GST would apply on sale of under-construction properties i.e. prior to the receipt of Occupancy Certificate (OC). Under GST, the tax rate has been pegged at 18% (or 12% for specified affordable housing projects), with a standard 33% abatement being provided towards the value of the land. Thus, the effective GST rate for sale of under construction properties is 12%/8% of the entire agreement value as compared to around 5.5% (i.e. 4.5% Service Tax and 1% VAT under the composition scheme with limited credits) under the erstwhile indirect tax regime. Needless to say, GST levy is over and above the stamp duty (around 5%) payable on the agreement value.
This leads to an overall tax burden of around 17%-13%. Such a heavy tax burden on the transaction results in cost escalations for the final consumers. However, GST allows broader level of ITC, the agreement value should ideally reduce.
Multiple GST rates (5%, 12%, 18% and 28%) on procurement of inputs and input services is another aspect which adds complexity to the taxation system and leads to unwarranted classification disputes. The Government has indicated that it will continue to work on rationalization of rates and try to move towards a simplified tax rate structure. This has partially been recently addressed with rate reduction from 28% to 18% coming into effect on 27 July 2018.
Items Eligible for Input Tax Credit
ITC can be claimed on the following:
- Raw materials and input goods
- Input services related to business operations
- Capital goods used for business purposes
- Import of goods and services (IGST paid on imports)
Items Ineligible for ITC
GST law specifies certain items on which ITC cannot be claimed, such as:
- Motor vehicles (except in specific cases like transportation or training)
- Goods and services used for personal consumption
- Goods given as gifts or free samples
- Construction of immovable property (except for plant and machinery)
- Membership fees for clubs, health, and fitness centers
How to check input tax credit in GST portal?
In an Electronic Liability Register, all liabilities accrued by the taxpayer are displayed. Payments made from the Electronic Cash Ledger and/or credit utilised to discharge the liabilities are also shown in the register.
To view the Electronic Liability Register, perform the following steps:
1. Access the https://www.gst.gov.in/ URL. The GST Home page is displayed.
2. Login to the GST Portal with valid credentials.
3. Click the Services > Ledgers > Electronic Liability Register command.
The Electronic Liability Register page is displayed.
How to Claim Input Tax Credit Under GST?
Follow these steps to claim ITC:
- Verify Invoices: Ensure all invoices are GST-compliant.
- Match Invoices with GSTR-2A/2B: Reconcile purchase invoices with auto-generated GSTR-2A/2B.
- File GST Returns: File GSTR-3B and GSTR-1 accurately.
- Maintain Proper Documentation: Keep records of invoices, returns, and payment receipts.
- Claim ITC within Time Limits: ITC must be claimed before the due date of the September return of the next financial year or the date of filing the annual return, whichever is earlier.
Benefits of Input Tax Credit
- Cost Reduction: Reduces the tax burden on businesses.
- Prevents Double Taxation: Ensures tax is paid only on the value addition.
- Encourages Compliance: Motivates businesses to work with GST-compliant vendors.
- Improves Cash Flow: Minimizes the working capital tied up in taxes.
Common Mistakes to Avoid While Claiming ITC
- Incorrect or Missing Invoices: Ensure invoices are complete and accurate.
- Delayed ITC Claims: File ITC claims within the prescribed time limit.
- Non-Reconciliation of Invoices: Regularly reconcile GSTR-2A/2B with purchase records.
- Claiming ITC on Ineligible Items: Cross-check the eligibility before claiming ITC.
Recent Updates on ITC under GST
The GST Council periodically updates rules regarding ITC eligibility and procedures. Some recent changes include:
- Increased Reconciliation Requirements: More stringent matching of invoices.
- Time Limit Adjustments: Revised timelines for claiming ITC.
- E-Invoicing Mandate: Mandatory e-invoicing for businesses with specified turnover.
Conclusion
Input Tax Credit under GST is a powerful tool for businesses to reduce tax liabilities and enhance profitability. By understanding the rules, maintaining proper documentation, and adhering to compliance requirements, businesses can effectively utilize ITC and save money.
FAQs
1. Can ITC be claimed on capital goods?
Yes, ITC can be claimed on capital goods used for business purposes.
2. Is ITC available on exempt supplies?
No, ITC is not available for inputs used in the supply of exempt goods or services.
3. What happens if ITC is claimed incorrectly?
Incorrect ITC claims can lead to penalties and interest on the excess credit claimed.
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