Input Tax Credit (ITC) is the important concept under new indirect tax law system, i.e. GST. One of the major benefit under GST is that it will remove cascading effect i.e. tax on tax in the tax system. This cascading effect was removed because of ITC system. Every registered person shall be entitled to take credit of input tax charged on any inward supply of goods and services.
# Conditions to avail Input Tax Credit (ITC):
Furtherance of Business:
Tax on those supply, which is used in furtherance of business is available for ITC. Here, the furtherance of business doesn’t mean only purchases. Furtherance of business means any supply which is used or in the course of business.
For example: GST paid on audit fee is available as ITC.
Possession of Tax Invoices:
Documentary evidence of tax paid. i. e. tax invoices, credit note is mandatory to be in possession of assesses who is availing Input Tax.
GSTIN to be mention:
Documentary evidence must contain GSTIN of both supplier and recipient.
Delivery is mandatory:
Mere passing the entries in books of accounts doesn’t avail Input Tax. Goods must be actually received or services must be actually availed.
Payment to Supplier:
Assessee who is availing Input Tax is necessarily made payment of supply along with tax amount within 180 days from date of issue of tax invoices. If assessee has not made payment of supply within 180 days, then the amount of tax which was taken as input tax credit was added to output tax liability of assessee.
Further, ITC is avail to assessee when assessee made payment to his creditor. (see rule 37 of CGST Rules 2017, read along with section 16(2)(d) of CGST Act, 2017)
# Input Tax Credit is not available on following supplies Section 17(5)
1. Motor Vehicle and other conveyances Except:
- If they are used for providing taxable services of further supply of motor vehicle or transportation of passengers or providing services of training, driving, flying, navigating such vehicle or conveyances.
- When motor vehicle is used for transportation of goods.
2. Food Beverages, outdoor catering, cosmetic and beauty treatment, health services plastic surgery etc.
3. Membership of club, Health and Fitness Center
4. Life Insurance Policy, Health Insurance.
5. Work Contract services, when supplied for construction of immovable property (other than Plant and Machinery) except where it is an input service for further supply of work contract services.
6. Goods and Services received by the taxable person for construction of immovable property (other than Plant and Machinery) on his own account including when such goods or services are used in course of furtherance of business.
# Input Tax Credit on Capital Goods:
Capital Goods was defined under section 2(19) of CGST Act,2017. Capital Goods means goods, the value of which is capitalized in books of accounts of the person claiming Input Tax and which was used or intended to be used in the course of furtherance of business.
The definition of capital goods is very vast now. In the earlier law i.e. excise duty. The definition of capital goods is very restricted and complicated.
Now in order to claim ITC on capital goods, there is one condition which was given in Section 16(3) of CGST, Act
"If a registered person has claimed depreciation on tax component under Income Tax Act, 1961 then no ITC of GST paid on such capital goods is allowed."
# How Input Tax Credit is used in GST:
GST laws levies tax in 3 form i.e. IGST, CGST, SGST/UTGST. ITC law is equally applicable to all the above three laws, But there are some rules regarding inter-taxation set off of input. These rules are.
1. Input Tax Credit of IGST:
Input of IGST will be used to pay tax payable as IGST, but if there is no tax payable as IGST then credit of IGST can be set off with CGST, If there is also no CGST liability then IGST credit can be used for payment of SGST. If there is also no SGST payable then input of IGST will be carry forward to next month.
2. Input Tax of CGST:
Input of CGST will be used to pay tax payable as CGST, but if there is no tax payable as CGST then credit of CGST can Be used for payment of IGST, If there is also no IGST liability then CGST credit Then credit of CGST will be carry forward to the next month.
3. Input of SGST:
Input of SGST will be used to pay tax payable as SGST, but if there is no tax payable as SGST then credit of SGST can be used for payment of IGST, If there is also no IGST liability then SGST credit will be carry forward to the next month.
# Restrictions on used of ITC:
- ITC cannot be used for payment of Interest and late fee under GST.
- ITC cannot be used for payment of demand generated by Assessing Officer under Section 74 and 75 of CGST Act, 2017.
- Payment of tax under Reverse Charge Mechanism.
- Payment of tax under section 10 i.e. Composition levy.
- CGST credit can’t be used for payment of SGST and SGST credit can’t be used for payment of CGST.