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GST, a one-tax system that was introduced in the last year, was a complex tax system that was understood by few. The previous articles have made it easier to breakdown the GST into simpler terms. One of the fundamental features of GST is Input Tax Credit. There is a seamless flow of input credit across the country as well as across the chain that is from the manufacturing of the goods until it is consumed.
WHAT IS INPUT TAX CREDIT?
At the time of paying tax on output, one can reduce the tax if they have paid on inputs and pay for the balance amount. This is called as Input Tax Credit.
For example, if you buy a product from a registered dealer, you will have to pay taxes on the purchase. One selling, you collect the tax. Here, you adjust the taxes paid at the time of purchase with the amount of output tax that is called as tax on sales. Also, the balance liability of tax, that is tax on sales minus tax on purchase, has to be paid to the government. This system is called as the utilization of input tax credit.
The amount to be paid if you are a manufacturer:
- Tax payable on output (FINAL PRODUCT) is Rs 450
- Tax paid on input (PURCHASES) is Rs 300
- You can claim INPUT CREDIT of Rs 300 and need to deposit Rs 150 in taxes.
These amounts are applied across India and Chennai. We, at MyGSTzone, have a team of Input Tax Consultants at Chennai who can help you simplify and explain the Input Tax Credit System.
WHO CAN CLAIM INPUT TAX CREDIT?
Only a person who is registered under GST can claim input Tax Credit. He/she also needs to complete the below mentioned prescribed conditions to be eligible to claim Input Tax Credit:
- The dealer should be in possession of tax invoice
- The said goods/services should be received
- Returns have to be filed.
- The tax charged has to be paid to the government by the supplier.
- When goods are received in installments, Input Tax Credit can be claimed only when the last lot is received.
- Input Tax Credit will not be allowed, if depreciation has been claimed on tax component of a capital good
Also, a person who is registered under GST’s Composition Scheme is not eligible to claim Input Tax Credit.
WHAT CAN BE CLAIMED AS INPUT TAX CREDIT?
Input Tax Credit has its boundaries that is restricted for business purposes only. Input Tax Credit will not be available for those goods or services that is used for:
- Personal use
- Exempt supplies
- Supplies for which Input Tax Credit is specifically not available
DOCUMENTS REQUIRED FOR CLAIMING INPUT TAX CREDIT
The Input Tax Consultant would need the below mentioned prerequisite documents that is required to claim Input Tax Credit:
- Invoice issued by the supplier of goods/services
- The debit note issued by the supplier to the recipient
- Bill of entry
- An invoice issued under certain circumstances. For instance, the bill of supply issued instead of tax invoice if the amount is less than Rs 200 or in situations where the reverse charge is applicable as per GST law.
- An invoice or credit note issued by the Input Service Distributor (ISD) as per the invoice rules under GST.
- A bill of supply issued by the supplier of goods and services or both
All the aforementioned documents are to be furnished while filing form for GSTR – 2. This is applicable to Chennai and the rest of India.
RECONCILIATION OF INPUT TAX CREDIT
Input Tax Credit, if claimed by the person, has to match with the details furnished by his/her supplier in their GST return. If any discrepancies or mismatches arises, then the supplier and recipient would be asked to communicate the same after filing the GSTR – 3.
REVERSAL OF INPUT TAX CREDIT
Input Tax Credit can be claimed on those goods and services that are used for business purposes. Input Tax Credit cannot be availed if they are used for non – business purposes like personal use or for making exempt supplies. Apart from these, certain other circumstances can reverse Input Tax Credit.
Input Tax Credit can be reversed in the following cases-
- Non-payment of invoices in 180 days–
Input Tax Credit will be reversed for invoices that were not paid within 180 days of issue.
- Credit note issued to ISD by seller–
If the seller issued a credit note to the HO then the Input Tax Credit subsequently reduced will be reversed.
- Inputs and Capital goods partly for business purpose and partly for non – business purposes like exempted supplies or for personal use –
This is for businesses that use inputs for both business and non-business (personal) purpose. Input Tax Credit used in the portion of input goods/services for the personal purpose will be reversed proportionally.
- Input Tax Credit reversed is less than required-
Post – annual return is furnished, this method is calculated and used. If total Input Tax Credit on inputs of exempted/non-business purpose is more than the Input Tax Credit actually reversed during a year, then the difference amount will be added to output liability and the necessary interest will be applicable.
The details of reversal of Input Tax Credit should be furnished in GSTR – 2. Input Tax Consultant wing in our organisation will help you to be careful of these reversals. These reversal rules abide by GST laws and are applicable in Chennai and other States of India.
SPECIAL CASES OF INPUT TAX CREDIT
Input Tax Credit for Capital Goods
Input Tax Credit can be availed for capital goods under GST. However, Input Tax Credit above it is not available for –
- Capital Goods used exclusively for making exempted goods
- Capital Goods used exclusively for non-business (personal) purposes
If depreciation is claimed on tax component of capital goods, then Input Tax Credit cannot be claimed.
Input Tax Credit on Job Work
A principal manufacturer sends goods to a job worker for further processing. For example, a shoe manufacturing company sends partially made shoes to job workers who will fit the soles. In such a situation, the principal manufacturer will have the opportunity to take credit of tax paid on the purchase of such goods that is sent to a job work.
Input Tax Credit will be allowed to goods that are sent to job worker in cases like:
- From principal’s place of business
- Directly from the place of supply of the supplier of such goods
However, to enjoy Input Tax Credit, the principal must receive the goods sent within one year and three years for capital goods.
Input Tax Credit Provided by Input Service Distributor (ISD)
An Input Service Distributor (ISD) can be the head office or a branch office or registered office of the registered person under GST. Input Service Distributor collects the Input Tax Credit on all the purchases made. They distribute it to all the branches, or the recipients, under different heads, that is CGST, SGST, UTGST, IGST and cess.
Input Tax Credit on Transfer of Business
In cases of amalgamations, mergers, transfer of business, this type of credit applies. The transferor will have available Input Tax Credit that will be passed to the transferee at the time of transfer of business.
Therefore, we at MyGSTzone will help you breakdown and claim the Input Tax Credits through the guidance of our Input Tax Consultant. We abide by the rules prescribed in the GST Law that is applicable to whole of India and Chennai.