INPUT TAX

CREDIT
UNDER
GST

SUBMITTED BY:
ADIBA MAAZ
SECTION A
2019-342-010
 INDTRODUCTION
• Input Tax Credit (ITC) is a mechanism under the Goods and Services Tax (GST) system that allows
businesses to deduct the amount of tax paid on inputs (like raw materials and services used in
production) from the tax they are charged on outputs (their final products and services).
• This system, which replaces earlier indirect taxes such as VAT, service tax, and excise duty, helps
prevent the cascading effect of taxes—where taxes are paid on taxes throughout the supply
chain. Under GST, ITC ensures a seamless credit flow across the entire supply chain and at every
stage of production and distribution. This makes GST a more efficient, destination-based tax
system, reducing the overall tax burden on the final consumer.
• In India, under GST law, a business enterprise can claim an input tax credit while calculating
output tax on their goods sold or services provided. The net tax liability should be paid as
prescribed under the GST law.
• An input tax credit is available on the GST paid on all inputs, consumables, raw materials, semi-
finished goods, and other eligible goods or services.
PURPOSE OF INPUT TAX
CREDIT

1. Cascading Effect: Before GST, 2. Promoting Seamless Flow

taxes like CST were levied on top of of Credit: With GST, every
each other, leading to a cascading purchase is matched with a
effect where taxes were charged sale, ensuring that the flow of
on top of already taxed amounts. credit across the entire supply
GST eliminates this, as tax is only chain remains uninterrupted.
applied to the value added at each This facilitates smoother
stage of production or
business operations and
distribution .One of the key
avoids bottlenecks caused by
features of GST is the provision of
tax-related complications.
seamless input tax credit, which
addresses and minimizes this
issue.
 4. Cost Reduction: By allowing
businesses to claim credit for taxes
3. Reducing tax liability:
paid on inputs, GST reduces the final
Businesses can offset the
tax they paid on purchases cost of goods and services. This makes
against the tax they owe businesses more competitive and
on sales. This reduces their benefits consumers.
overall tax liability.

5. Boosts Compliance: ITC

encourages businesses to
comply with tax
regulations as they have a
direct incentive to
correctly report their
purchases and sales to
claim credits.
 UNDERSTANDING INPUT CREDIT

For example, you are a manufacturer –

•Tax payable on output (final product) is
Rs 450
•Tax paid on input (purchases) is Rs 300
•You can claim input tax credit of Rs 300
and you need to pay only Rs 150.

-The output liability should be paid on or

before the filing of the GST return. The
liability should be discharged by way of an
electronic challan.
 WHAT IS INPUT TAX UNDER GST?
The definition of "input tax" as per Section 2(62) of the CGST Act is crucial for
understanding the mechanics of the Input Tax Credit (ITC) under the GST
system.

Input tax credit (ITC) mechanism is available under the GST Act for registered
entities engaged in various activities including:
• Manufacturing
• Supplying
• Acting as an agent
• Operating as an e-commerce operator
• Acting as an aggregator
• Any other entity mentioned in the GST Act
Section 2(62) of CGST Act defines ‘input tax’ as follows:
“Input tax” in relation to a registered person, means the Central tax (CGST), State tax (SGST),
Integrated tax (IGST) or Union territory tax (UTGST) charged on any supply of goods or services
or both made to him and includes—

• The integrated goods and services tax charged on the import of goods,
• The tax payable under the provisions of sub-sections (3) and (4) of section 9 [reverse charge
of CGST],
• The tax payable under the provisions of sub-sections (3) and (4) of section 5 of the
Integrated Goods and Services Tax Act [reverse charge of IGST],
• The tax payable under the provisions of sub-section (3) and sub-section (4) of section 9 of the
respective State Goods and Services Tax Act [reverse charge of SGST], or
• The tax payable under the provisions of sub-section (3) and sub-section (4) of section 7 of the
Union Territory Goods and Services Tax Act [reverse charge of UTGST], but does not include
the tax paid under the composition levy. Input Tax Credit is eligible only when it is credited to
electronic credit ledger of taxable person.
 M ECHA N I SM O F IN P U T TA X CR ED I T
The bifurcation of the basic terms and mechanism are as follows

1. ‘Input’ has been defined under Sec 2(59) of CGST Act to mean
 Any goods other than capital goods,
 Used or intended to be used by supplier,
 In the course or furtherance of business,
It may be noted that goods under the CGST Act has been either classified as input or capital
goods. But Capital goods are first inputs and then on the basis of their accounting treatment,
they get classified as Capital goods.

2.Capital goods’ has been defined under sec 2(19) of CGST Act to mean
 Goods
 The value of which is capitalized
 In the books of accounts
 Of the person claiming the credit
 Which are used or intended to be used
 In the course or furtherance of business.
Thus, as per provisions of GST law, any goods will become capital goods in case their value is
capitalized in the books of the person and such goods are intended to be used in the course or
furtherance of business.

3.Input service:

•The term ‘Input Service’ has been defined under Sec 2 (60) of the CGST Act to mean:
 Any service,
 Used or intended to be used by supplier,
 In the course or furtherance of business.

Thus, any service which is used or intended to be used in the course or furtherance of business
of recipient of such service will be termed Input Service.
ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX
CREDIT

1. ELIGIBILITY

Registration:

Section 16(1) of CGST Act, 2017 says that every registered taxable person shall, subject to such conditions and
restrictions as may be prescribed and within the time and manner specified in possession of a tax invoice; debit
note or other tax paying document issued by a registered taxable supplier.

Every person registered under the GST Act is entitled to take the credit of input taxes charged on the supply of
goods or services or both which are used or to be used in the course or furtherance of business.
The said amount of input tax credit shall be credited to the electronic credit ledger of such person.
The “intention to use” the goods and /or services in the course or furtherance of business would also suffice for
availing ITC on such goods and/or services. Thus, tax paid on goods and/or services which are used or intended
to be used for non- business purpose cannot be availed as credit.

.
 CONDITIONS FOR CLAIMING ITC
Credit of input taxes shall be available to the registered person only if the following conditions are
satisfied. There are 4 conditions that needs to be fulfilled

CONDITIONS:-

• Condition 1: Possession of Tax Invoice

He is in possession of a tax invoice or a debit note issued by the registered supplier, or such other tax
paying documents prescribed. Further, input tax credit shall be available only when the specified
particulars are mentioned on the said documents.
• Condition 2: Receipt of goods or services or both :

He has received the relevant goods and or services. The goods or services or both should have been
received by the registered person to be eligible to claim ITC. However, the registered person need not
receive the goods or service himself. It is sufficient even if the goods or service are delivered/provided
to some other person on his direction.
• ITC in case of goods received in lots or instalments
The first proviso to Section 16(2) of CGST, 2017 says that where the goods against an
invoice are received in lots or instalments, the registered taxable person shall be
entitled to take a credit upon receipt of the last lot or instalment. Moreover, the
second proviso to Section 16(2) of CGST, 2017 says that where a recipient fails to pay
to the supplier of services, the amount towards the value of supply of services along
with tax payable thereon within a period of three months from the date of issue of
invoice by the supplier, an amount equal to the input tax credit availed by the
recipient shall be added to his output tax liability, along with interest thereon, in the
manner as may be prescribed
• Failure to make payment for the invoice within 180 days
In case of availment of input tax credit on eligible inputs and input services, there is a
further condition that the payment of the invoice value together with the tax
component will be paid within a period of 180 days of such invoice.
• Condition 3: Tax charged on supply actually paid to the Government

The tax charged on the goods or services or both have been paid to the Government either

through utilization of credit balance available or through cash.

• Condition 4: Filing of Return

The registered person taking the Input tax credit must have filed his return under section 39.

• Other conditions

ITC not admissible if depreciation is claimed on tax component as per section 16(3)-Where a

registered person has claimed depreciation on the tax component of the capital goods and plant

and machinery, the input tax credit of such tax component shall not be allowed. Thus in respect

of tax paid on such items, dual benefit cannot be claimed under Income Tax Act, 1961 and GST

laws simultaneously.
• ITC can be claimed by a person registered under GST only if he fulfills all the conditions as
prescribed,
a) The dealer should be in possession of tax invoice
b) The said goods/services have been received
c) Returns have been filed
d) The tax charged has been paid to the government by the supplier
e) When goods are received in instalments ITC can be claimed only when the last lot is
received
f) No ITC will be allowed if depreciation has been claimed on tax component of a capital good
 HOW TO AVAIL INPUT CREDITS?

Step 1: Mr A will upload the details of all tax

invoices issued in GSTR 1.
Step 2. The details with respect to sales to Mr B
will auto-populate/ get reflected in GSTR 2A or
GSTR-2B, the same data will be pulled when Mr
B will file GSTR 2 (i.e details of inward supply).
Step 3: Mr B will then accept the details that
the purchase has been made and reported by
the seller correctly and subsequently the tax on
purchases will be credited to ‘Electronic Credit
Ledger’ of Mr B and he can adjust it against
future output tax liability and get the refund.
 REVERSAL OF INPUT TAX
CREDIT
The reversal of Input Tax Credit (ITC) is a crucial procedure in tax management
that occurs when previously claimed tax credits on inputs must be returned. This
reversal typically adds the credited amount back to the output tax liability,
effectively cancelling the earlier benefit. ITC reversal is mandated under several
conditions, such as the non-payment of supplier invoices within a specified
period or the use of goods or services for non-business purposes. This process
ensures that tax credits are accurately accounted for and that tax is only applied
to value addition.
 THE CIRCUMSTANCES REQUIRING ITC REVERSAL CAN VARY BUT GENERALLY
INCLUDE THE FOLLOWING:-

• Reversal of input tax credit if payment not made to the supplier within 180 days- As
per the Notification No. 26/2022—Central Tax, dated 26th December 2022, Rule 37 of GST was
amended,according to which
- if a registered taxpayer has availed ITC on the supply of goods and/or services but has yet to pay
for the supply along with tax payable on it within 180 days of the issue of the invoice, the ITC claim
will be reversed. This ITC reversal shall be made in the GSTR-3B return filed after the expiry of 180
days of the invoice’s issue date. However, this provision does not apply to supplies on which GST is
payable on a reverse charge basis.
- the amendment also introduced a new rule 37A based on Section 16(2)(c) of the CGST Act, 2017
states that if a taxpayer has availed input tax credit in return form GSTR 3B but the return in form
GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been
furnished by such supplier till the 30th day of September following the end of the financial year in
which the input tax credit in respect of such invoice or debit note has been availed, the said amount
of input tax credit shall be reversed by the said registered person while furnishing a return in form
GSTR-3B on or before the 30th day of November following the end of such financial year.
Rule 38: Claim of credit by a banking company or a financial institution.
• As per CGST Rule 38, a banking company or financial institution, including NBFC,
engaged in the supply of services by way of accepting deposits or extending loans or
advances that do not comply with the provisions of Section 17(2) shall reverse 50% of
the input tax credit availed in Form GSTR 3B.
Rule 42: Manner of determination of input tax credit in respect of inputs or input
services and reversal thereof.
• CGST Rule 42 deals with the reversal of input tax credit on non-payment of the
supplier within 180 days from the date of the invoice.
• Section 16(3)
Section 16(3) states that ITC shall not be availed if the registered person has
claimed depreciation on the tax component of the cost of capital goods and
plant and machinery under the provisions of the Income tax Act, 1961 (43 of
1961). Such ITC, if availed, shall be reversed at the time of closing books of
accounts for that financial year.
• Section 17(5)
Section 17(5) states that ITC shall not be availed in certain cases and shall be
reversed at the time of filing regular returns up to the date of filing annual
returns
INELIGIBLE OR BLOCKED TAX CREDITS
SECTION 17(5)
• In respect of items of goods and services and also the circumstances in which input tax
credit will not be eligible are contained in Sec 17 of CGST Act. In case the goods or
services fall in sec 17 of CGST Act, input tax credit will not be eligible.
• This provision provides a list of 11 clauses on which ITC is not available for claims.
Section 17 (5) of CGST Act overrides provisions of Section 16(1) “
Availability of ITC in general when used for business” and Section 18(1) “
ITC availability in special cases”.
• Section 17 (5) of CGST Act must be followed mandatorily, otherwise, the recipient or
buyer must reverse such wrongfully claimed ITC. Further, they will incur interest at the
rate of 24% from the date of such claim until the date of reversal.
 GOOD AND SERVICES WHICH ARE
INELIGIBLE:
 Goods or services used for non business purposes or used for personal consumption

 Goods or services used for exempt supplies (Value of exempt supply would include supplies
on which the recipient is liable to pay tax on reverse charge basis)

 Goods or services received for construction of an immovable property and works contract
service when supplied for construction of an immovable property (other than plant and
machinery)

 Goods or services on which tax has been paid under composition tax scheme

 Specific goods or services such as food, outdoor catering, health services, membership of
clubs, rent- a-cab, travel benefits extended to employees on vacation, life and health
insurance etc. However, credit of the services which are obligatory for an employer to
provide to its employee under any law would be eligible.
 RULE 36 OF CENTRAL GOODS AND SERVICE
TAX RULES
The documentary requirements for the purpose of availing input tax credit has been provided in Rule 36 of
Central Goods and Service Tax Rules. The rule prescribes the following documents on the strength of which input
tax credit can be availed by the registered taxable person:

a) An invoice issued by supplier of goods and or services.

b) An invoice issued by the recipient of goods and or services in pursuance of sec 9(3) or 9(4) of the Act. Such invoices are
required to be issued by recipient of goods and services for payment of tax on reverse charge basis.
c) A debit note issued by supplier of goods and or services.
d) A bill of entry or other similar document issued under the Customs Act in respect of IGST credit on imported goods.
e) An ISD invoice, ISD credit note or any other document issued by input service distributor.

f) Input tax credit shall be availed by a registered person only if all the applicable particulars as prescribed in Invoice Rules are
contained in the said document, and the relevant information, as contained in the said document, is furnished in form GSTR-2
by such person - Rule 36(2) of CGST and SGST Rules, 2017.8 Normally, Input Tax Credit is taken on basis of ‘Electronic Credit
Ledger'. However, if advance payment was made before receipt of goods and services, input tax credit cannot be taken as goods
and services are not received. At the time of payment of GST on the advance, the supplier of goods and services cannot issue a
tax invoice. He has to issue only ‘receipt voucher’.’
• Input tax credit shall be availed by a registered person only if all the applicable
particulars as prescribed in Invoice Rules are contained in the said document,
and the relevant information, as contained in the said document, is furnished
in form GSTR-2 by such person - Rule 36(2) of CGST and SGST Rules, 2017.
Normally, Input Tax Credit is taken on basis of ‘Electronic Credit Ledger'.
However, if advance payment was made before receipt of goods and services,
input tax credit cannot be taken as goods and services are not received. At the
time of payment of GST on the advance, the supplier of goods and services
cannot issue a tax invoice. He has to issue only ‘receipt voucher'.