Input Tax Credit (ITC) is a crucial mechanism under the GST regime that allows businesses to reduce their tax liability by claiming credit for GST paid on purchases used in the course of business. However, to avail of ITC, taxpayers must fulfill several conditions outlined under Section 16 of the Central Goods and Services Tax (CGST) Act.
This guide simplifies the provisions of Section 16 for easier understanding.
Section 16(1): Basic Eligibility
A registered person is eligible to claim input tax credit on the GST paid on goods or services that are used or intended to be used in the course or furtherance of business.
The eligible credit gets added to the electronic credit ledger as per the rules.
Section 16(2): Conditions to Claim ITC
A registered person cannot claim ITC unless the following conditions are satisfied:
Section 16(2)(a): Possession of Tax Document
The buyer must possess a valid tax invoice or debit note issued by a registered supplier.
Section 16(2)(aa): Invoice Matching
- The supplier must report the invoice details in their GST returns, and
- These details must be communicated to the buyer through the GST portal.
Section 16(2)(b): Receipt of Goods or Services
The buyer must have received the goods or services.
Explanation of 'Receipt':
A buyer is deemed to have received goods/services in the following cases:
(i) The supplier delivers goods to a third party on the buyer's instructions.
(ii) The supplier provides services to another person on behalf of the buyer.
Section 16(2)(ba): ITC Not Blocked
The ITC related to the supply must not be restricted or blocked under Section 38 (as communicated through the GST portal).
Section 16(2)(c): Tax Paid to Government
The tax charged on the supply must be actually paid to the government by the supplier, either in cash or through utilized ITC.
Section 16(2)(d): Return Filing
The buyer must have filed the relevant GST return under Section 39.
Provisos to Section 16(2): Special Situations
1st Proviso: Multiple Lots
If goods are received in instalments against a single invoice, ITC can only be claimed after the last lot or installment is received.
2nd Proviso: Non-Payment to Supplier
If the buyer fails to pay the supplier (value + tax) within 180 days from the invoice date:ITC must be reversed along with interest under Section 50.
3rd Proviso: Reclaiming ITC
Once payment is made to the supplier:
The reversed ITC can be reclaimed by the buyer.
Section 16(3): ITC Restriction for Depreciated Assets
If a taxpayer claims depreciation on the GST component of capital goods under the Income Tax Act:
ITC cannot be claimed on that component under GST.
Section 16(4): Time Limit to Claim ITC
A registered person cannot claim ITC:
- After 30th November, following the end of the financial year to which the invoice pertains, OR
- After filing the annual return for that year, whichever is earlier.
Proviso to Section 16(4): FY 2017-18
For invoices relating to Financial Year 2017-18, ITC could be claimed till the return filing for March 2019.
Section 16(5): Transition Period for ITC (FY 2017-18 to 2020-21)
For invoices dated FY 2017-18 to FY 2020-21, ITC could be claimed:
Up to 30th November 2021.
Section 16(6): Credit after Registration Restoration
If a taxpayer's GST registration is cancelled and later restored, ITC may still be claimed:
Subject to specified timelines and conditions.
Summary of Key Conditions to Claim ITC
Condition: Requirement
- Valid Document: Tax Invoice or Debit Note
- Invoice Reporting: Supplier has filed a return and the invoice is visible in the buyer's GSTR-2B
- Receipt of Supply: Goods/services received physically or as per instructions
- Tax Payment: Tax paid to the government by the supplier
- Return Filing: Buyer has filed GSTR-3B
- Payment to Supplier: Within 180 days from the invoice date
- Time Limit: Before 30th Nov of next FY or before filing annual return, whichever is earlier
Thank You for Reading
Thank you for taking the time to read this article. I appreciate your attention and interest in the topic. I hope the insights shared here prove valuable in your professional endeavours. Your feedback or perspective is always welcome. Please feel free to connect or continue the conversation.
Disclaimer: The author has tried to avoid mistakes, but doesn't promise that the information in this document is complete, correct, or up to date. The author isn't responsible for any problems, losses, or damages caused by using this information. Readers are encouraged to consult with qualified professionals to obtain advice tailored to their individual circumstances.
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