A very important concept for calculating and making GST payment is “Input Tax credit” ( GST Credit). In simple terms, Input credit means the adjustment of GST tax payable on sales of goods or services against GST tax receivable on purchase.
Input Tax Credit in GST: ( GST Credit )
Goods and Service Tax (GST) is new tax regime introduced in India which has replaced major indirect taxes. This new tax regime is expected to bring a better control mechanism for tracking and payment of indirect taxes.Under this new system, most of the indirect taxes levied by Central and the State Governments on supply of goods or services or both, would be combined together under a single levy.
Under the earlier system of taxation, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments,and vice versa. One of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently.As the tax charged by the Central or the State Governments would be part of the same tax regime, the credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.
The input tax credit mechanism will help in eliminating the cascading effect of taxes and is supposed to reduce the final price to the wholesaler, retailer and ultimately to the consumer too. This concept was introduced with a popular believe that this will cause a paradigm shift from individuals paying more taxes to more individuals paying taxes.
Taxes under GST Regime :
Under GST regime, there are three types of taxes:
SGST – State GST (The GST tax is levied on goods or services which are consumed within the state in which such goods are manufactured.);
CGST – Centre GST (The GST tax is levied by central government on goods or services which are consumed within the country in which such goods are manufactured.)
IGST – Integrated GST (The GST tax is levied when goods or services are consumed by any other state other than the state in which such goods are manufactured.)
The simple rule for adjusting input tax credit for payment of SGCT, CGST and IGST is as below:
- For paying IGST liability input credit of IGST, SGST and CGST can be considered and then payable amount can be calculated.
- For paying CGST liability input credit of CGST & IGST can be taken and then payable amount can be calculated.
- For paying SGST liability input credit of SGST &IGST can be taken and then payable amount can be calculated.
Furthermost, the credit of CGST & SGST cannot be cross-utilized for making GST payment.
Input Credit calculation sample :
The manufacturer purchases goods worth Rs.50 on which there is Rs.5 as GST. The manufacturer then converts it into a product and now the selling price is Rs.100. For selling the product, he pays Rs.10 as tax on Rs.100.
Now the Manufacturer will pay GST as :
Rs.10 (Output GST Tax) – Rs.5(Input GST tax credit) = Rs.5 (Actual GST payable)
Who can claim input credit under GST?
Every GST user who are registered the normal GST regime is allowed to claim and utilize input tax credit for paying off the GST payments.
Read our post about GST registration here.
A few important requirements for claiming input tax credit for every registered user are:
- You must have a GST tax invoice(of purchase) or debit note issued by registered GST dealer.
Note: Where goods are received in lots/installments, credit will be available against the tax invoice upon receipt of last lot or installment.
- You should have received the goods/services as on date of such claim or adjustment.
Note: Where recipient does not pay the value of service or tax thereon within 3 months of issue of invoice and he has already availed input credit based on the invoice, the said credit will be added to his output tax liability along with interest.
- The tax charged on your GST invoice purchases has been deposited or paid to the government by the supplier in cash or via claiming input credit.
The input tax credit mechanism under GST regime was designed to track and match all the tax claimed and paid. The input credit under GST system is to be allowed only if your supplier has deposited the tax he collected from you. So every input credit you are claiming shall be matched and validated before you can claim it.Government of India and GST department right now are focusing on completion of filing of the pending returns, thus this process has been temporarily put on hold for indefinite period.
Who cannot claim input tax credit under GST regime?
Input Tax credit cannot be availed by the following people or organizations’:
- Input Tax credit cannot be availed on goods/services received by a non-resident taxable person.Note: Input Tax credit is only available on any goods imported by him.
- Input Tax credit cannot be availed for the goods/ services used for personal purposed and not for business purposes.
- Input Tax credit cannot be availed for goods lost, stolen, destroyed, written off or given off as gift or free samples.
- Input Tax credit cannot be availed in case of GST raised due to fraud.
- Input Tax credit cannot be availed by standalone restaurants that charge only 5% GST (As per Notification No. 46/2017 dated 14th November 2017).
- Input Tax credit cannot be availed by the person who has opted for composition scheme under GST law.
- Input Tax credit cannot be availed for goods/services for construction of an immovable property on his own account.(Note: But this rule does not apply to plant or machinery)
- Input Tax credit cannot be availed for any work contract services.
- Input Tax credit cannot be availed in the case of travel, benefits extended to employees on vacation such as leave or home travel concession.
- Input Tax credit cannot be availed for rent-a-cab, health insurance and life insurance.
- Input Tax credit cannot be availed on any membership fees for gyms, clubs etc.
- Input Tax credit cannot be availed motor vehicles and conveyances.
Documents required for claiming the input tax credit:
- Invoice issued by a supplier of goods or services or both under the GST law.
- Invoice issued by recipient along with proof of payment of tax
- Debit note issued by supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
- Bill of entry or similar document prescribed under Customs Act
- Revised invoice
- A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules.
Time Limit for Availing GST Input Tax Credit
On a general basis, ITC mentioned for above situations can be claimed only within one year from the date of issue of tax invoice relating to supply. The specific details for claiming the GST Input tax credits are as below:
- If a person is liable to registration, or applied for registration, or is granted registration: the person can claim the input tax credit amount on the day from which he becomes liable to pay GST tax.
- If a person takes voluntary registration: the person can claim the input tax credit amount on the day of registration.
- A registered taxable person who stops paying tax under composition levy scheme: the person can claim the input tax credit amount on the day from which he becomes liable to tax normally under section 7.
Input Tax credit as mentioned in any of the above situations can be claimed within one year from the date of issue of tax invoice relating to supply.
In any other case, the last date to claim input tax credit is the date of the below two, whichever is early:
- Before filing of valid return for the month of September (under section 27) following the end of F.Y. to which such invoice is related, or
- Before filing of the annual return
Carry-Forward of unclaimed input tax credit under GST
There is always a possibility to have an unadjusted-unclaimed input credit balance at the month end due to GST taxes on purchases being higher than GST taxes on sale.
In such a case, you have two options: either to carry forward the unadjusted input tax credit for the next month and use the amount against next month payment or claim a refund.
Note: No interest is paid on excess GST input tax credit balance by the government.
The above article is complete list of do’s and don’ts for calculating and claiming input tax credit. Please follow the above details and be GST compliant. Input tax credit claims and payment process is supposed to remove the cascading effect of taxes and bring down the prices. If you like the article, please rate it.