What is Input Tax Credit (ITC) in GST

In GST, Input Tax Credit (ITC) can be defined as a type of tax credit that is available to GST-registered entities who have paid taxes on the goods and services purchased by them as inputs for the business. This tax credit can subsequently be deducted from the GST applicable to the final supply made to the end user so that the overall GST liability of the registered GST entity decreases. So, the formula to calculate Net GST liability will look like:

Net GST Liability = Total GST Liability at time of supply – Input Tax Credit

To understand how the input tax credit works better, let’s consider a simple example. Suppose Supplier B purchases raw material from Supplier A and pays Rs. 500 as GST on the purchase. Subsequently, Supplier B uses the raw materials purchased from Supplier A to provide finished goods to Customer C which have total GST amount of Rs. 1000. Now, while Supplier B is required to pay tax authorities Rs. 1000 as GST on the sale, a GST payment of Rs. 500 has already been made as part of the process of purchasing inputs. This Rs. 500 is considered as input tax credit and is deducted from the GST payable at the time of supply to the customer. So, net GST to be paid by Supplier B to tax authorities will be Rs. 500.

The key eligibility criteria that needs to be fulfilled before an entity or individual can avail the benefit of the ITC mechanism include the following:

1. The entity seeking GST benefit must be registered under GST

2. The GST amount paid must be shown by the invoice provided by the registered supplier

3. The receipt of goods and/or services must be completed (including last shipment in the case of multiple shipment)

4. The GST registered supplier needs to have submitted the due GST to tax authorities and filed the applicable tax returns

5. If ITC has not already been included cost of capital goods and no depreciation on such tax has been claimed

6. The maximum time to claim input tax credit under GST has not passed

The time limit for availing input tax credit under GST is specified in Section 16(4) of the CGST Act, 2017. The earlier time limit was amended with effect from 1st October 2022. Subsequent to the amendment, the maximum time limit for claiming ITC under GST rules is the earlier of the following:

a) The 30th of November following the end of the applicable financial year or

b) Date of filing annual GST returns using Form GSTR 9

So for the previous Financial Year ending 31st March 2023, input tax credit must be claimed on or before 30th November 2023 or date of filing GSTR 9 Form (due by 31st December 2023).

Below are some of the key documents that a GST-registered entity needs to provide in order to avail the benefit of input tax credit:

• Valid invoices issued by suppliers
• Valid ITC entry must be visible in GSTR-2B submitted of buyer/recipient
• Bill of entry
• Valid bill of supply issued by the supplier as per applicable GST invoice rules
• Invoice/Credit Note issued by Input Service Distributor as per GST invoice rules

The above list of documents is for illustrative purposes only and there may be other documents that can be used for the purpose of availing input tax credit on a case by case basis. The applicable document(s) need to be submitted at the time of filing GSTR-2 in order to avail the benefit of ITC under GST.

While there are many different instances where input tax credit (ITC) can be claimed under the current Goods and Services Tax (GST) regime, some of the common instances of there include the following:

There are some situations where even after payment of GST, input tax credit can be claimed. A few expenses where ITC is not allowed include:

• Travel expenses of employee during period of leave
• Valid ITC entry must be visible in GSTR-2B submitted of buyer/recipient
• Goods and services utilized for construction of immovable property for personal or business use
• Any goods/services exclusively for personal use
• Standalone restaurants charging 5% GST on food but are not allowed to claim ITC on inputs
• Expenses related to CSR (corporate social responsibility) initiatives
• Purchase of goods and services for business purposes made by an entity registered under the GST composition scheme

The above list is illustrative and there can be many additional instances where claiming input tax credit is not allowed. The complete list items ineligible for ITC can be found in Section 17(5) of the CGST Act, 2017.