“INPUT TAX CREDIT (ITC)”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (142) 04/12/2021

COMPILED BY ER. AVINASH KULKARNI

INPUT TAX CREDIT (ITC)

Input tax credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale

ie businesses can reduce their tax liability by claiming to the extent of GST paid on purchases

Input Tax

The tax you paid on the purchase of such input material is called as Input Tax

However, to pay tax on such finished goods you can avail the deduction of the tax that you have already paid on inputs materials (used in the manufacturing of finished goods) and just pay the balance as the net tax liability

The eligible person for ITC

A registered person (including an input service distributor) can claim ITC in the strength of the following conditions

1) he must possess a tax invoice issued by the supplier of goods or services or both or debit note issued by a supplier

2) he must have received a supply of goods or services or both

3) he must have paid the tax for it in cash or as input tax as under section 41 of GST act

4) he must have filed proper returns under section 39 of GST act

Claiming of ITC

1) ITC can be claimed on all the inputs and capital goods in one installment subject to the conditions under section 16(2) of the GST

2) a registered taxable person gets goods or services for his own consumption, can not claim ITC

3) it is not necessary to pay the supplier immediately to claim the ITC, but payment must be made within 180 days of such supply being made (Section 16(2))

4) ITC can not be utilized for payment of arrears in tax

5) when taxable inputs are used for manufacturing and such finished or semi-finished goods are supplied partly as taxable supply and partly as non-taxable supply, then ITC eligible on such supply is calculated proportionately to the extent of its taxable component section 17(1)

6) a person can not take ITC wrt goods lost, stolen, destroyed or written off

7) ITC wrt of goods given as gifts or free sample are also not allowed section 17(5)(h)

8) a registered taxable person can take ITC on the debit/credit notes received from an unregistered supplier like invoices received from such person by making entries in GSTR-2 and paying the tax under reverse charge mechanism section 16(4)

9) ITC on capital goods like solar panels is available if they are used in the course or furtherance of business section 16(1)

10) a registered taxable person under composition scheme under TNGST & CGST act can not claim ITC

11) SGST of one state can not be utilized for discharging the output tax liability of another state

12) SGST credit can be used for payment of IGST liability under the same GSTIN only

13) tax will be collected in the state from where the supply is made, the supplier will collect GST and the recipient will take IGST credit (section 12 of GST act)

14) a person who is eligible to get registered when not getting registered within the period of 30 days he can not claim ITC on the stock in hand (section 25(1))

ITC under VAT

ITC is the credit that a manufacturer has received for having paid input taxes towards the inputs that have been used in the manufacture of goods and products

In a similar manner, a dealer will be entitled to ITC

Calculation of ITC in GST

1) calculate the tax credit available with you for eligible goods or services

2) determine the utilization at each level

3) calculate the final GST of the finished goods or services

4) claim the available ITC

GST payable = (Output GST) – (input GST)

Benefits of ITC

1) reducing the tax burden

2) eliminating duel tax

3) tax levied only on addition of value on goods or services and not only on final goods

4) simplicity

5) transparency

6) easy for the taxpayer

Blocked Credits under ITC

Goods exclusively used for

1) personal use

2) exempt supplies

3) supplies for which ITC is not available

Expenses qualify for ITC

1) commercial rent

2) equipment rentals

3) advertising related expenses (business cards, flyers, ads)

4) accounting, legal and professional fees

5) home office and motor vehicle expenses

6) office expenses (postage, computers, pens, and paper)

7) travel (hotel, airfare, car rentals)

Capital expenses qualify for ITC

1) capital property

2) machinery and vehicles

3) furniture and appliances

4) improvements to capital property

Nonqualified expenses for ITC

1) goods and services you purchased for your own personal use or enjoyment

2) taxable goods and services brought or imported to provide exempt goods and services

3) some capital property

4) membership fees or dues to any club whose main purpose is to include recreation, dining, and sporting facilities

Section 155 of CGST Act, 2017

Where any person claims that he is eligible for ITC under this act, the burden of proving such claim shall lie on such person

Input

Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business

Input Service

It means any service used or intended to be used by a supplier in the course or furtherance of business

Capital goods

It means goods, the value of which is capitalized in the books of account of the person claiming the ITC and which are used or intended to be used in the course or furtherance of business

Documents required for availing ITC

1) tax invoice issued by the supplier

2) tax invoice (self) – reverse charge

3) debit note issued by a supplier

4) bill of entry (imports)

5) invoice or a credit note issued by an ISD

Terms used in ITC

1) T = total input tax of input and input services

2) T1 = ITC for non business

3) T2 = ITC for exempt supply

4) T3 = ITC of blocked credits (inputs only)

5) C1 = T – (T1+T2+T3) valid ITC invECL

6) T4 = ITC for taxable supply

7) C2 = C1 – T4 ie common ITC

8) E = value of exempt supplies

9) F = aggregate turnover
10) D1 = E / (F * C2) ie value of ITC for exempt supply (from common ITC)

11) D2 = C2 * 5% ie value of ITC for non business purpose (from common ITC)

12) C3 = C2 – (D1 + D2) ie eligible ITC from common ITC

13) T4 + C3.= Total eligible ITC for use

Time period to avail ITC

ITC can be availed within

1) 1 year from the date of invoice

2) September following the end of the financial year

3) date of filing of annual return

Whichever is earlier

Basic concepts of ITC

1) to introduce to levy tax on value addition only

2) ITC can be taken on the GST incurred for input supply which can be used to make the payment of tax liability on output supply

3) to reduce cascading of taxes

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
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