GST Input Tax Credit Reconciliation
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GST Input Tax Credit Reconciliation
What is input tax credit?
The input tax credit (ITC) serves as a crucial mechanism within the Goods and Services Tax (GST) framework. It encompasses Central Tax (CGST), State Tax (SGST), Integrated Tax (IGST), or cess paid by a GST-registered individual on the supply of goods or services. Notably, it covers taxes paid on a reverse charge basis and IGST incurred on imported goods. However, taxes paid under the composite taxation scheme are not included in ITC.
This credit represents the tax paid by a business during purchases, and its primary purpose is to offset the tax liability when making sales. The GST Act is founded on the principle of value addition, with taxes levied at each stage of the supply chain until reaching the end consumer. To counter the cascading effect of tax liabilities on the procurement of raw materials, consumables, plants, and machinery, the mechanism of offsetting these liabilities is termed input tax credit.
Every entity with GST registration in the supply chain plays a role in controlling, collecting, and remitting GST taxes. The provision of input tax credit is instrumental in preventing double taxation and mitigating the cascading impact. It allows businesses to set off taxes paid on the procurement of raw materials, consumables, goods, or services used in the manufacturing, supply, and sale of goods or services.
The input tax credit mechanism promotes tax neutrality, ensuring that the tax element does not become a component of the cost of production or the cost of supplying goods and services. This not only streamlines the taxation process but also contributes to the overall efficiency and cost-effectiveness of businesses operating under the GST regime.
Eligibility criteria for Input tax credit
Who can claim input tax credit?
Certainly, claiming input tax credit (ITC) under GST is subject to certain conditions. Here are the key conditions that a person registered under GST must meet to be eligible for claiming ITC:
- The input tax credit can be claimed only by a person that has a GST registration and has filed the GSTR 2 returns.
- The dealer should possess the tax invoice or the debit note that is issued by the supplier of input or the input services.
- The said goods or services or both should be received.
- The supplier has made the GST payment that is charged to the government concerning such supply.
- When the goods are received in installments the input tax credit can be claimed only when the last lot is received.
- No Input tax credit is allowed if depreciation has been claimed on the tax component of a capital good.
- The transport document number should be indicated. It includes goods receipt number, railway receipt number, airway bill number.
Documents required for claiming GST Input tax credit
What documents are required for claiming the GST input tax credit?
As a registered taxable person the input tax credit can be claimed on basis of the following documents:
step:1 An invoice that is issued by the supplier of goods or services
step:2 An invoice that is issued by the recipient of the goods and services supplied by an unregistered dealer. Such supply comes under the reverse charge mechanism. This mechanism involves the supplies made by an unregistered person to a registered person.
step:3 A debit note that is issued by the supplier of the tax charged is less than the tax payable concerning such supply.
step:4 A bill of entry or similar documents is also required to document an integrated tax on imports.
step:5 An invoice or the credit note that is issued by an input service distributor as per the rules under GST.
step:6 A supply bill by a dealer that is opting for a composition scheme or an exporter or a supplier of the exempted goods.
Basic requisites for claiming the input tax credit
What are the conditions under which Input tax credit can be claimed?
The following requisites are mandatory for claiming the input tax credit under the GST:
- The Individual must be registered under the GST law.
- A tax invoice or the debit note that is issued by the registered supplier showing the tax amount.
- The goods or the service should be received.
- Where the goods are received in parts or installments, the input tax credit may be claimed on the receipt of the last lot or the installment
- Where the input tax credit is included in the cost of the capital goods and the depreciation on the tax is claimed, no input tax credit is allowed.
- The input tax credit will not be allowed if the same is not been claimed within the prescribed time.
- The transport document number should be indicated. It includes goods receipt number, railway receipt number, airway bill number.
Claiming the Input tax credit
How to claim the Input tax credit?
All the regular taxpayers have to report the amount of the in the GSTR 3B.
A taxpayer can claim the input tax credit on the provisional basis in the GSTR 3B up to 20% of the eligible ITC that is reported by the supplier in the auto-generated GSTR 2A return. The taxpayer must cross-check the GSTR 2A figures before proceeding with the GSTR 3B.
Before the 9th of October 2019, a taxpayer was able to claim any amount of the provisional input tax credit. But CBIC has notified that from October 9, 2019, a taxpayer can claim only 20% of the eligible ITC available in the GSTR 2A as the provisional input tax credit.
This means that the amount of input tax credit that is reported in the GSTR 3B will be the total of the actual ITC in the GSTR 2A and the provisional ITC which is 20% of the actual eligible ITC in the GSTR 2A. It is important to match the purchase register with the GSTR 2A becomes very important.
Reversal of Input Tax Credit
The input tax credit can be reversed certain circumstances which are mentioned below:
- Failure to pay the supplier within 180 days from the invoice date.
- The goods and services whether inputs or capital goods are used for personal purposes.
- Goods and services utilized for producing or supplying the exempted goods or services.
- Sale of capital goods or plant and machinery on which the input tax credit was claimed.
- The credit notes are issued by the input service distributor.
- The supplies are ineligible under section 17(5) of the Act.
- A change from the registered regular dealer to composite dealer, where the input tax credit is reversed.
- The amount that is reversed may be added to the output tax liability in the month in which it is reversed,
- Interest is to be paid from the date the credit is availed till the date when the amount is reversed and paid.
- There is no time limit applicable for reclaiming the reversed credit.
Availing credit under Reverse Charge Mechanism
How to avail of the credit when the tax has been paid under the Reverse Charge Mechanism?
- The liability has been discharged through cash.
- The goods or services have been used for business purposes.
- Self-invoicing is done on the purchases as no tax invoice can be issued by the unregistered supplier.
Reconciliation of Input tax credit
Special cases of Input tax credit
Input tax credit for Capital goods
You've highlighted an important aspect of Input Tax Credit (ITC) eligibility under the Goods and Services Tax (GST) system. Specifically, ITC is not available for capital goods that are used exclusively for making exempted goods and exclusively for personal purposes.
Input tax credit for Capital goods
A principal manufacturer may send goods for further processing to a job worker. In such cases ITC will be allowed on the goods that are sent to the job worker in these cases:
- From a principal place of business
- Directly from the place of supply of the supplier of such goods.
To enjoy the input tax credit the goods must be received back by the principal within 1 year.
The input tax credit that is provided by the Input Service Distributor
Certainly, an Input Service Distributor (ISD) can function as the head office, branch office, or registered office of a person who is registered under GST. The role of an ISD is to collect input tax credit on all the purchases made and then distribute this credit to all the recipients within the organization.
Input tax credit on the transfer of business
Absolutely, the transfer of input tax credit (ITC) in the context of amalgamations, mergers, or the transfer of business is a significant consideration under the Goods and Services Tax (GST) system. When there is a transfer of a business or a merger, the available ITC with the transferor can be passed on to the transferee.
Goods and Services not eligible for Input Tax Credit
Under GST, the input tax credit is not available in respect of the following goods or services:
1. Motor vehicles, except when they are supplied in the course of business or used for providing taxable services like:
- Transportation of passengers
- Transportation of goods
- Providing training on driving, flying, navigating such vehicles
- A further supply of such vehicles or conveyance
2. Supply of goods and services concerning food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where a registered taxable person uses such inward supply of goods or services of a particular category for making an outward taxable supply of the same category of service
3. Membership of a club, health, and fitness center
4. Rent a cab, life insurance, health insurance, except where it is statutorily obligatory for an employer to provide such services
5. Travel benefits extended to employees on vacation, such as leave or home travel concession.
6. Goods and services received by the principal in the construction of immovable property, other than plant and machinery except where it is an input service for the supply of works contract service
7. Goods and services received by a taxable person for constructing an immovable property on his account, other than plant and machinery, even when used in the furtherance of business.
8. Goods and services on which tax has been paid under composition scheme
9. Goods and services used for personal consumption
10. Goods lost, stolen, written off, or disposed of by way of gift or free samples.
11. Tax paid after detection of fraud, wilful misstatement, or suppression.
12. Tax paid for the release of detained or seized goods.
13. Tax paid for the release of confiscated goods.
| Features | Proprietorship | Partnership | LLP | Company |
|---|---|---|---|---|
| Definition | Unregistered type of business entity managed by one single person | A formal agreement between two or more parties to manage and operate a business | A Limited Liability Partnership is a hybrid combination having features similar to a partnership firm and liabilities similar to a company. | Registered type of entity with limited liability to the owners and shareholders |
| Ownership | Sole Ownership | Min 2 Partners Max 50 Partners | Designated Partners | Min 2 Shareholders Max 15 Directors Max 200 Shareholders 1 Director 1 Nominee Director |
| Registration Time | 7-9 working days | |||
| Promoter Liability | Unlimited Liability | Limited Liability | ||
| Documentation | Partnership Deed | LLP Deed Incorporation Certificate | ||
| Governance | – | Under Partnership Act | LLP Act, 2008 | Under Companies Act,2013 |
| Transferability | Non Transferable | Transferable if registered under ROF | Transferable | |
| Compliance Requirements | Income tax filing if turnover is more than Rs.2.5 lakhs | ITR 5 | ||
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