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Q. What is Input Tax Credit? Explain various provisions to claim credit under GST.

Ans. GST has revolutionised the Indian indirect taxation and Input Tax Credit is one of the key features, which has helped in eliminating the cascading effect of taxes. 

When one buys raw materials as inputs to create and sell his product, he pays tax on the material or input. So when one is required to pay tax on the finished good or output, he can take the deduction of the tax that has already been paid on such inward materials and just pay the balance as the net tax liability. This is known as Input Tax Credit.

Provisions to Claim Input Tax Credit in GST

Let us now use an example to understand how to claim your input tax credit:

Suppose a company named XYZ Tyres Company (recipient) made a purchase of 10 tons of rubber from another company named ABC Rubber Company (supplier). Both the companies are registered for GST. The two companies will reconcile their transactions, and the recipient will claim the input tax credit, as follows:

  • ABC Rubber Company will file the GSTR 1 report (Details of outward supply).
  • The details furnished in the GSTR-1 will be automatically fetched in the GSTR-2A (Details of inward supply) for XYZ Tyres Company, where they will be able to see the transaction details.
  • XYZ Tyres Company will then check the records and make any necessary modifications / additions if any.
  • Once the changes are made, this information will be automatically pulled when they will file the GSTR-2. The correct input credits will then be credited to their electronic credit ledger.
  • ABC Rubber Company can then use the GSTR-1A form to view and accept the changes that XYZ Tyres Company made in the GSTR-2.
  • Finally, once ABC Rubber Company has filed the monthly returns (GSTR-3) and has paid the respective tax liability, XYZ Tyres Company will be able to avail the input tax credit and apply it to future output tax liabilities.
  • In cases where the tax on purchases is higher than the tax on sales, the extra input credit can be carried forward or claimed as refund.

Time Limit for Claiming ITC

A registered taxable person can get ITC in the prescribed time and manner. In the table given below, there are different situations in which inputs can be claimed for stock or semi-finished goods or finished goods.


Situation

Details

Day on which ITC can be claimed for stock, SFG or FG (held on immediately preceding day)

1

If a person is liable to registration, or applied for registration, or is granted registration

The day from which he becomes liable to pay tax

2

If a person takes voluntary registration

The day of registration

3

A registered taxable person who stops paying tax under composition levy scheme

The day from which he becomes liable to tax normally


Other conditions

ITC mentioned for above situations can be claimed only within one year from the date of issue of tax invoice relating to supply. In any other case, the last date to claim ITC is earlier of the two below:

  • Before the filing of valid return for the month of September following the end of FY to which such invoice is related, or
  • Before the filing of the annual return

Note: As per section 44, the last date for filing of annual return is 31st December following the end of the financial year.

The author can be reached at vinayak.charu@gmail.com 

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