Input Tax Credit
Input Tax Credit or ITC is a credit that can be used to pay off the tax liability of registered taxpayers. It is a tax paid by the person registered under the GST Act when he purchases goods or avails any services from a registered taxable person. It helps the registered taxpayer to reduce his tax liability when he sells goods or render any services. The input tax credit is available only to a person who is registered under the Act. This helps the subsequent taxpayer to provide goods or services at a reasonable cost.
In simple words, Input tax credit means credit which can be used while payment of tax on outward supplies or sales. Let us understand this with the help of an example:
Say, A is a registered Taxpayer–
Tax payable on output (FINAL PRODUCT) is Rs 150
Tax paid on input (PURCHASES) is Rs 100
A can claim INPUT TAX CREDIT of Rs 100 and A only need to deposit Rs 50 in while setting off its outward supplies.
The Input tax credit introduced with the view to remove the cascading of taxes that were there in India. There were a number of taxes which were imposed on the goods or services and the input of different taxes paid by the taxpayer was not available to him in different stages due to which the price of the goods as well service increased when ultimately consumed by the consumer.
In order to provide the benefit of the input at various stages and in order to cascade the effect of tax the concept of the Input tax credit, was made effective.
The pre-condition to avail the benefit of ITC is to get registered first under the GST Act. A person who is not registered under the Act is not eligible to take the benefits of ITC.
SECTION 16: ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT
ELIGIBILITY: Every registered taxpayer is eligible for Input Tax Credit of outward supplies made by him however some condition and restriction have to be followed as provided under Section 49. This Input Tax Credit will be automatically credit to the credit ledger of the registered taxpayer. Registered Taxpayer can use this Input Tax Credit to reduce its tax liability.
In order to avail the Input Tax Credit following condition must be fulfilled by the registered taxpayer:
(a) He must be in possession of a valid Tax invoice or any Debit note as may be prescribed under the GST law;
(b) he must have received the goods or services as defined under the valid invoice.
(c) Return must be submitted with the GST portal
(d) Tax which is being charged on the goods on outward supplied must have been paid to the govt.
(e) Other conditions as may be prescribed under the Act.
The input tax credit can be availed on capital goods, plant, and machinery however in that case depreciation on the tax component of cost of the same shall not be available and shall not be allowed.
SECTION 17 - HOW TO USE INPUT TAX CREDIT
It is to be noted that if goods purchased, used partially for business and partially for any other purpose, the amount of credit shall be utilized only to the purpose of business.
In case the goods are being used by the registered taxpayer partially for effecting supplies including zero-rated supplies and partly for exempt supplies, the amount shall be utilized only to the taxable supplies including zero-rated supplies.
Banking Company, Financial Institution or an NBFC, have the option to either comply with the above provisions or avail of, every month, an amount equal to 50 percent of the input tax credit.
How to utilize the Input Tax Credit?
Input Tax Credit can be used in the following manner:
- IGST credit shall be used towards the payment of IGST liability first then if some amount is left the same shall be used for the payment of CGST, SGST/UTGST liability.
- CGST credit shall be used towards the payment of CGST liability first then if some amount is left the same shall be used for the payment of IGST liability.
- SGST/UTGST credit shall be used towards the payment of SGST/UTGST liability first then if some amount is left the same shall be used for the payment of IGST liability.
- CGST credit cannot be used for the payment of SGST/UTGST liabilities. The same shall be payable in case of input of their respective head if available in ledger
- SGST/UTGST credit cannot be used for the payment of CGST liabilities. The same shall be payable in case of input of their respective head if available in ledger
- No Input Tax Credit can be used to pay reverse charge liabilities.
- Input Tax Credit can be used for the payment of tax only. This means that Input Tax Credit cannot be used for the payment of penalty/fee/TDS/TCS/interest/ others and the same shall be payable in cash only