What is Input Tax Credit (ITC)?

What is an Input Tax Credit?

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Input Tax Credit is the GST feature that allows businesses to claim the credit for the GST paid on the purchase of goods or services made for business purposes. It allows businesses to offset the GST they have paid against the GST they collect from customers. ITC ensures that tax is paid only on the value addition at each stage of the supply chain, thus avoiding double taxation.

 

If a manufacturer pays GST on raw materials and then collects GST on the sale of finished goods, the GST paid on raw materials can be deducted from the GST collected on sales. For example, if a manufacturer pays INR 10,000 GST on procuring raw materials and collects INR 15,000 GST on the sale of finished products, the manufacturer can claim an ITC of INR 10,000 and pay only INR 5,000 as net GST. This mechanism prevents the cascading effect of taxes. It also reduces the overall tax burden and ensures transparency in the taxation system.

 

Who Can Claim Input Tax Credit in ITC?

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Any registered person under GST can claim ITC on meeting the following criteria:

 

• A valid tax invoice must be available.
• Goods or services must be received.
• GSTR-3B should be filed by the recipient.
• Suppliers must pay the tax to the government.
• Payment towards the invoice or debit note must be made within 180 days from the invoice date.
• For goods received in instalments, ITC can be claimed only after receiving the final lot.
• ITC applies only to taxable supplies used for business purposes.
• ITC cannot be claimed if depreciation is applied to the tax component of a capital good.
• ITC must be claimed within the earlier of the following:
  • 30th November of the year after the financial year of the invoice/debit note.
  • Date of filing the annual return.
• ITC claims in GSTR-3B must match GSTR-2B as per CGST Rule 36(4).
• Businesses under the composition scheme cannot claim ITC.

 

What Can Be Claimed as ITC?

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The following types of taxes paid by the claimant while availing goods and services for business purposes can be claimed as ITC:

 

• Central GST (CGST), paid on intra-state or intra-union territory purchases
• State GST (SGST), paid on intra-state purchases.
• Union Territory GST (UTGST) paid on intra-union territory Purchases
• Integrated GST (IGST), Paid on inter-state purchases or imports.

Eligible and Ineligible ITC

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Input tax credits is not available  in certain cases (exclusion list) as per Section 17 (5) of the Central Goods and Services Tax (CGST) Act, 2017. All other transactions outside this list qualify for ITC.

 

Ineligible ITC

 

1. Motor vehicle - No ITC for personal use (allowed for resale, commercial use, or mandated cab services).
2. Food & Beverages: ITC is not available for catering, health, or related services unless legally required.
3. Membership Fees: No ITC on club or gym memberships.
4. Insurance: Health and life insurance excluded, except when mandated by law.
5. Construction Expenses: ITC is not allowed for building immovable property.
6. Lost or Destroyed Goods: No ITC on damaged, lost, or gifted items.

 

Documents Required for Claiming ITC

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The following are the documents required for claiming ITC:

 

• Tax invoice issued by the supplier of goods and services
• Tax Invoice issued by recipient along with proof of payment of tax
• A debit note issued by the supplier as per the provisions of Section 34, if applicable
• Bill of entry for imports or similar document as prescribed under the Customs Act
• A credit note/document issued by the Input Service Distributor for any subsequent adjustments.

 

 

Time Limit to Claim Input Tax Credit

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The time limit for claiming ITC under the Goods and Services Tax (GST) regime is clearly defined under Section 16(4) of the CGST Act, 2017. A registered person can claim ITC for an invoice or debit note pertaining to a financial year up to the date of filing the annual return or 30th November of the following financial year, whichever is earlier.

 

Reversal of Input Tax Credit

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• ITC must be reversed in cases like:

• Non-payment to the supplier within 180 days.
• Inputs and capital goods used for exempt or non-business purposes.
• Credit note issued to Input Service Distributor (ISD)  by seller etc.

 

The reversed amount must be added to the output tax liability in the relevant return.

 

Conclusion

 

Input Tax Credit is a cornerstone of GST that fosters efficiency in the supply chain and gives businesses significant tax relief. However, the benefits of ITC come with conditions, eligibility criteria, documentation requirements, and timelines that must be followed. By understanding the ITC mechanism, businesses can ensure compliance while reducing the cascading effect of tax.