What Is Input Tax Credit and How Does It Work?

In the GST code, an input tax credit refers to the tax paid on products or services that is deducted from the tax due on external deliveries. In other terms, an input tax credit is the tax reduced from the output tax payable on the delivery of goods and services, which is also known as ITC complete form in GST.

In the case of GST, who is eligible to claim an input tax credit?

Based on any of the following papers, any registered individual is eligible to claim credit for input GST calculator charged on any delivery of goods or services acquired by him that are utilized or supposed to be used in the conduct of his business:

  • A tax invoice has been issued.
  • Note of debit
  • Bill of lading
  • Invoices are prepared on a reverse charge basis.
  • Input Service Distributor issues a document for the distribution of GST input tax credit.

Keep the following in mind when claiming GST Input Tax Credit:

  • The commodities or services, or both, must be utilized in the course of business or intended to be used in the course of business.
  • A tax invoice or debit note issued by a GST-registered provider is required.
  • Upload the appropriate invoice to the GST online portal.
  • The provider has paid the appropriate amount of tax to the government, either in cash or through the use of an ITC.

f all of the above conditions are met but the supplier is unable to provide the invoice in his GSTR-1, a provisional input tax credit of up to 5% of the credits that are eligible and furnished by the supplier in his GSTR-1 can be claimed.

  • When products are delivered in instalments, the input tax credit can be claimed upon receipt of the final instalment.
  • If a person receiving goods or services or both fails to pay the supplier within 180 days of the invoice date, an amount equivalent to the input tax credit claimed, plus interest, will be added to the person receiving goods or services or both output obligation. In the case of GST, the aforementioned ITC can be reclaimed upon payment of the supply’s value and tax. This condition, however, does not apply to supplies that are paid on a reverse charge basis.
  • If depreciation on the tax component of the cost of plant and machinery and capital goods has been claimed under the Income Tax Act, no ITC will be given.
  • GST input tax credit must be claimed by the due date for filing a return in September of the following year, or delivering an annual return, whichever comes first.
  • In the case of taxable/zero-rated supply, an ITC is possible.
  • Non-taxable, exempt, or nil-rated supplies do not qualify for an ITC.
  • Within 30 days of becoming eligible for the GST input tax credit, one must file a declaration in FORM GST ITC-1.
  • Where credit exceeds Rs.2, 00,000, a declaration covering information of inventories and capital goods, as well as a certificate from a Chartered Accountant or Cost Accountant, must be submitted, according to Rule 5.
  • After one year from the date of the tax invoice, the supplier is no longer eligible to claim GST input tax credit for goods or services, or both.

Item(s) Not Eligible for GST Input Tax Credit

The GST input tax credit mechanism allows GST-registered individuals to offset their tax liability. The input tax credit method ensures that the ultimate GST liability is passed on to the customer, as GST is a consumption-based tax. Although a person registered under GST can claim input tax credit for most inputs, some items and services are not eligible for input tax credit.

Conveyances or Motor Vehicles

Only when motor vehicles or conveyances are utilized for the purpose of making more vehicles or conveyances, transporting people, giving training, or transporting commodities can input tax credits be claimed. As a result, expenses associated to the regular use of a motor vehicle for business purposes are not eligible for an input tax credit.

Outdoor Catering, Food, and Beverages

Expenses relating to food, beverages and outdoor catering can be claimed as input tax credit only when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. As a result, regular taxpayers would be ineligible to collect input tax credits on food, beverage, and catering expenses.

Cosmetic and plastic surgery, as well as beauty treatments and health services

Beauty treatment, health services, cosmetic and plastic surgery-related expenses cannot be claimed as input unless a registered person uses an inward supply of goods or services, or both, of a particular category to make an outward taxable supply of the same category of goods or services, or as part of a taxable composite or mixed supply. Similarly, membership fees at a club, health club, or fitness center are not eligible for an input tax credit.

Insurance for life and health

Expenses for rent-a-cab services, life insurance, and health insurance can only be claimed as input tax credits if the government has designated them as services that a business is required by law to provide to its employees. Otherwise, the inward supply must have been utilized to make an outward taxable supply of the same type or as part of a taxable mixed supply in order to claim input tax credit.

Employees’ Travel Benefits

Employee vacation perks, including as leave or home travel concessions, cannot be claimed as an input tax credit.

Contract Services for Works

When provided for the building of an immovable property (other than plant and machinery), works contract services cannot be claimed as an input tax credit. Work contract services, on the other hand, can be claimed as an input tax credit if they are used to deliver more work contract services.

Immovable Property Construction

Input tax credit cannot be claimed for goods or services received by a taxable person for the building of an immovable property (other than plant or machinery) on his own account or even when it is utilized in the course or furtherance of business. Construction, as defined by the GST Act, comprises re-construction, renovation, additions, changes, and repairs.

Taxable Person Who Isn’t a Resident

Input tax credit is not available for goods or services received by a non-resident taxable person, save for products imported by him.

Consumption by individuals

Input tax credits are not available for goods or services utilized for personal consumption.

Lost or Stolen or Damaged Goods

Goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples are not eligible for the Lost or Stolen or Damaged Goods Input Tax Credit.

Composition Supply

Composition Supply Input tax credit will not be available for goods or services that have been taxed under the Composition Scheme. In addition, tax paid in the form of interest, penalty, or fine will be ineligible for input tax credit.

If you are looking for GST related services in Chennai then consult one of our phoenixtax- GST consultant in Chennai.