Input Tax Credit: Meaning
Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.
VAT vs GST
The table below will clear the difference between ITC under VAT and GST. This shall enable us to understand the pre and post GST scenario with respect to ITC.
| Input Tax Credit under VAT | Input Tax Credit under GST |
| An origin-based charged | An end-based charged |
| Levying of multiple taxes (such as sales tax, entry tax, purchase tax) | All such diverse taxes have been done away with. Only a standard GST will be applicable based on the type of goods/services. |
| It leads to double taxation, resulting in an overall enhanced price of the product in case of Inter-state supplies. |
It will allow smooth and uninterrupted flow of input credit in the supply chain and prevent “cascading of tax” or “tax on tax” or simply “double taxation” activity. |
Who can claim the ITC benefit?
1. For claiming the ITC benefit, the person/entity should be registered under GST.
2. All business persons (i.e., individuals, HUF , Company, Firm, LLP, Association of persons, Body of individuals, registered trusts, societies etc. are covered under GST.
3. Mandatory registration:
(a) If the turnover in a financial year exceeds Rs. 20 lacs. For NE states the limit is Rs.10 lacs.
(b) It is also mandatory for persons engaged in inter-state taxable supply, e-commerce operators, non-resident tax persons, agents, aggregators etc.
4. Anyone who applies for registration under the Act within 30 days on which he becomes liable to registration can avail the ITC benefit. This shall apply to both semi-finished or finished goods in stock on the day immediately preceding the date from which he becomes liable to pay tax.
5. A person/entity who has obtained voluntary registration under the Act will also get the same benefit (as point 4).
- It is important to produce the tax invoice or any other tax paying document issued by the registered dealer.
- The manufacturer/dealer should actually receive the goods/service.
- The supplier must have already paid the tax on inputs and furnished the GST return in that regard. (This is an interesting provision as it enables verification and authentication of the amount sought to be claimed as a credit.)
- The supplier should be paid the cost of goods/services and the applicable tax on it within 180 days from the date when the invoice was issued by him. Non-compliance with this provision will enhance the output tax liability. However, after the amount is paid, the recipient will be entitled to avail the credit. Even if the recipient has made partial payment, partial credit will be allowed.
- Input tax credit is allowed on capital goods.
Time limit for availing ITC
The last date to claim ITC is earlier of the following.
- September of the following Financial Year to which invoice of supplies concerns, or
- The date of filing annual return.
Can I Claim ITC on all Goods and Services?
No, ITC is not available for the following goods and services.
1. Motor vehicles unless used for purely commercial purpose (training of driving, trading of motor vehicles, transportation of passengers or goods).
2. Goods and services related to health and hygiene. This includes the following foods and services:
- food & beverages, outdoor catering
- services given by hospitals and parlors i.e. beauty treatment, plastic/ cosmetic surgery
- memberships of clubs, gyms and other recreational centers
- benefits extended to employees on vacation such as accommodation, travelling tickets etc.
- rent a cab, life insurance and health insurance to employees unless it is statutory obligation of employer.
3. Goods/services used and availed for solely private use.
4. Works contract services when supplied for construction of immovable property other than plant & machinery except where it is an input service for further supply of work contract service.
5. Goods or services received by a taxable person for construction of immovable property on his own account (personally), other than plant & machinery, even when used in course of business;
Note: “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
Note: “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.
6. Goods and/or services falling under composition scheme;
7. Transitional Input tax credit (in respect of stock as on 30.06.2017) cannot be taken on purchase invoices which are more than one year old. Period is calculated from the date of the tax invoice.
8. In case the goods are lost, stolen, destroyed, written off, gifted, or given as free samples;
9. In cases of fraud, suppression, mis-declaration, seizure, detention when tax is paid to cover up the actual amount to be paid.
Thus, Input Tax Credit is a tool to encourage seamless flow of input credit. There are set guidelines for availing this benefit. It is a welcome move as it shall ensure the accountability of the suppliers to pay the required tax thus preventing the overall increase in the price. Moreover, there is a clear distinction between those who can avail this benefit as well as those who cannot.