Input tax credit(ITC) is one of the most important features available under GST. Thus, it is available as a benefit to the entire chain involved in the cycle. i.e from the starting point of manufacturer till the end consumer.

However, there are few conditions binding to avail input tax credit on capital goods under GST. Further, there is a list of ineligible input tax credit under GS T for goods and services. There are also, few statutory conditions for claiming ITC under GST.

Index of Main Topics

Meaning of Input Tax Credit

Ans. Input tax credit under GST means the central tax (CGST), State tax (SGST), or Union territory tax (UTGST) and integrated tax (IGST). This tax is charge a ble on the supply of goods or services or both made to a registered person.

Further, It also includes tax paid on a reverse charge basis and IGST charged on the imported goods. However, it does not include tax paid under composition levy or scheme.

Input tax credit on capital goods under GST

A) Does input tax credit includes tax paid on input goods, input services and capital goods?

Ans. Yes, it includes taxes paid on input goods, input services and capital goods. However, Credit of tax paid on capital goods is allowable to avail in one installment.

B) What happens to the credit when capital goods are sold?

Ans. The GST registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods, whichever is higher.

However, in the case of refractory bricks, moulds and dies, jigs, and fixtures when these are supplied as scrap, the person can pay tax on the transaction value.

Input tax credit on imported goods

There is a provision of the input tax credit on imported goods in the GST Act. W.e.f 01.07.2017 goods imported in India are treated as Interstate supply. Therefore, such goods attract IGST(Integrated Goods and Service Tax) charge. Beside IGST GST Compensation Cess is also charged to the importer. Later, the IGST and compensation cess paid is available as credit to the recipient or to the importer.

In order, to take the benefit of IGST and compensation cess (if applicable) importer must submit the GST number to the custom. Therefore, only a registered person can take the credit on such imports on the basis of a bill of entry filed.

Input tax credit on hotel bills under GST

The CGST and SGST charged by other state suppliers cannot be taken as an input tax credit in your state. However, one can take credit of the CGST and SGST charged by the hotel in the State where you have the registration. Secondly, the food bill is not eligible for credit as it falls under personal consumption which is excluded in Section 17(5) of the CGST Act.

Input tax credit on Insurance premium

The Input tax credit on life insurance and health insurance is not allowable under GST. However, if the Government notifies anytime the services which are obligatory for an employer to provide to its employees under any law for the time being in force then one can avail ITC on such services.

Also, if the above inward supply of services of a particular category is used by a registered person for making outward taxable supply of the same category of services then one can avail ITC on it.

Concept of the Input tax credit on job work

According to CGST section 19, the person who sends the material(principal) to a job worker is permissible to take an input tax credit on such material. However, there are certain conditions binding to avail this credit.

As per clause (b) of sub-section (2) of section 16 the principal can avail ITC, where goods are directly supplied to the job worker even without first bringing at his place.

Further, it is deemed that the principal has availed credit on input goods supplied to the job worker but not brought back within 1 year of its issue. Similarly, the period is 3 years from its date of issue in the case of capital goods.

Examples of Input tax credit

A) Mr. X, a registered person was paying tax under the composition scheme up to 30th July 2018. However, w.e.f 31st July 2018, Mr. X becomes liable to pay tax under the regular scheme. Is he eligible for ITC?

Ans. Mr. X is eligible for a credit on inputs held in stock. Also on inputs contained in semi-finished or finished goods held in stock and capital goods as on 30th July 2018. This is subject to reducing by such percentage points as may be prescribed in the law.

B) Mr. X applies for voluntary registration on 5th June 2018 and obtained registration on 22nd June 2018. Mr. X is eligible for the credit on inputs in stock as on..?

Ans. Mr. X is eligible for the credit on inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on 21st June 2018. However, Mr. X cannot take the credit in respect of capital goods.

Input tax credit Reversal

A GST registered person shall reverse the credit availed on inward supplies in the following cases.

Fails to pay to the supplier of goods or services within 180 days

Wrongly availed credit

Excess credit availed

The Recipient needs to reverse the ITC if the Supplier fails to deposit the tax to the government on the goods supplied to the recipient.

Similarly, the credit shall be reversed with 24% interest per day. you may read our article on interest calculation on ITC reversal.

Input tax credit on Reverse Charge

GST paid on reverse charge basis be available as an input tax credit to the recipient of goods or services. The definition includes the tax payable under the reverse charge mechanism.

Further, the recipient can take ITC even without making payment to the supplier. But he needs to pay the full amount along with tax within 180 days from the date of issue of an invoice to the supplier. However, this condition is not applicable where tax is payable on the reverse charge basis.

The time limit for taking ITC

A registered person can take ITC in respect of any invoice or debit note for supply of goods or services before furnishing the return under section 39 for the month of September following the end of financial year to which such invoice/invoice relating to debit note pertains or furnishing of the relevant annual return, whichever is earlier. Therefore, the upper time limit for taking ITC is 20th October of the next FY or the date of filing of annual return whichever is earlier.

The reason for this restriction is that no change in return is permissible after September of next FY. If you file your annual return before the month of September, then you can not change the values in t he annual return.

Input tax credit on gold purchase

According to the input tax credit rules, if taxpayers distribute the input goods, input services, and capital goods as a gift or free samples to the customer, ITC is not permissible. Thus, Giving free gold coins proves expensive for businesses due to the unavailability of its ITC. However, according to the article published by the business line, there is a lot of argument of experts and tax authorities on this matter.

ITC on goods destroyed or lost

One cannot take ITC with respect to goods lost, stolen, destroyed or written off. Further, ITC with respect to goods given as gifts or free samples is also not allowed.

ITC Rule for newly registered person

A person applying for New GST registration can take the ITC of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of the grant of registration.

If a person becomes liable to pay tax on 1st August 2018 and has obtained registration on 15th August 2018. Such a person is eligible for the credit on inputs held in stock as on:

(a) 1st August 2018

(b) 31st July 2018

(c) 15th August 2018

(d) He cannot take credit for the past period

Ans. 31st July 2018.

ITC in case of export of exempted supplies

If the input tax credit is permissible only in respect of goods or services or both for effecting taxable supplies, it will not lead to loss of credit on exempt supplies when exported.

This is because Zero-rated supplies are inclusive within taxable supplies of the credit. The scope of zero-rated supply is provided in the IGST Tax Act which includes even exempt supplies.

Restriction on the period for availing of ITC

A person cannot avail ITC after the expiry of one year from the date of issue of tax invoice relating to:

New GST registration

Change from composition to normal scheme

From exempt to taxable supplies

Ineligible input tax credit under GST

The Input tax credit is not available in some cases as mentioned in CGST section 17(5) of the CGST Act, 2017. Here is the list of ineligible input tax credit under GST goods on which the taxpayer shall not avail ITC. It is also known as a negative list of GST goods and services or both.

1. Motor vehicles and other conveyances

The input tax credit on Motor vehicles and other conveyances are not allowed under GST if they are used for personal purpose. However, there is an exception to this condition. If the motor vehicle and other conveyances are used for making the following taxable supplies, the ITC is available on such goods.

A further supply of such vehicles or conveyances

Transportation of passengers

Imparting training on driving, flying, navigating such vehicles or conveyances

For the transportation of goods

2. Ineligible input tax credit on Services

ITC is not eligible for the following type of services. However, the input tax credit is available, if the taxpayer uses such inward supplies to make outward taxable supplies for the same category of goods or services or both. Also, if he uses as an element of a taxable composite or mixed supply.

Food and beverages

Outdoor catering

Beauty treatment

Health services

Cosmetic and plastic surgery

Example of ITC Eligibility for the above items.

The Packed food items and beverages are liable for taxation when they are sold in the market. Therefore, the supplier can take the input tax credit on such inward supplies/inputs used for manufacturing these packed food items or beverages. The inputs, in this case, maybe like ingredients of food items, bottles for beverages, etc. ITC is available If the supplier includes the above items in a package of composite supply or mixed supply. These type of items includes like a pack of the Lunch box with free Coke drink.

03. Membership of a club, health and fitness Centre

The Input tax credit is not available on the invoice received for payment of fees made to become a member of any club. Similarly, this is applicable for obtaining membership of health and fitness center.

04. Rent-a-cab, life insurance, and health insurance

ITC on rent a cab, life insurance, and health insurance is not eligible under GST. However, if the government notifies the services which are obligatory for an employer to provide to its employees, ITC will be available. Also, if the above services are used for making outward taxable supplies or as an element of mixed or composite supply ITC may be available.

05. Travel benefits employees

The input tax credit is not available for Travel benefits provided to employees on vacation such as leave or home travel concession.

06. works contract services

Includes supplies for the construction of the immovable property. However, it excludes plants and machinery. ITC may be available if it is an input service for further supply of works contract service.

07. Goods/Services Received for construction of an immovable property

08. Tax paid under Composition Scheme

The credit i s not available on invoices issued by the composition scheme dealer. Thus, the receiver of goods and services shall not avail credit on such invoices.

09. Non-resident taxable person

The Input credit is not available on goods or services or both received by a non-resident taxable person except on the import of goods.

10. Personal consumption

Further, the ITC is blocked on any goods or services or both used for personal consumption.

11. Lost, stolen, destroyed, written off or disposed

No ITC is allowable on any goods which are, lost in transit/godown, stolen, destroyed, write-off or disposed of.

12. Another type of Taxes paid

Lastly, a taxpayer can not avail ITC on taxes paid towards interest, penalty, late fee, fine, etc . Similarly, it also includes Detention, seizure, and release of goods and conveyances in transit as per CGST sections 74, 129 and 130.

13. Not more than 20% Input Tax Credit

The recipient of goods or services shall avail only 20% Input tax credit on inward supplies if such inputs are not appearing in GSTR 2A. Thus, from 09.10.2019, the taxpayer is eligible to take 20% more ITC in addition to which it appears in GSTR 2A return. Notification Ref. 49/2019-Central Tax dt.09.10.2019. Also, refer to Circular No. 123/2019 dt.11.11.2019 clarifying this concept in more detail.

Further, the above limit is reduced from 20% to 10% w.e.f 01.01.2020 vide notification no. 75/2019- Central Tax dt. 26.12.2019.

How to check input tax credit in the GST portal?

In order to avail ITC under GST, you may want to see whether it is available on the GST portal or not. On the basis of availability on the GST portal, you may want to avail ITC to avoid the risk of a reversal in the future with high interest. Also, if you avail ITC wrongly or your supplier invoice who did not pay tax on such an invoice, then you will reverse such ITC with 24% interest per day.

Therefore, the GST portal has a feature, which gives you details of invoices uploaded by your supplier for your GST Number. If you see such invoices on the GST portal then you can be 100% sure for availing ITC.

So, you can refer to our article on how to download GSTR 2A from the GST portal. After downloading GSTR 2A in excel format you can see whether your supplier has uploaded invoices or not.

Further, if you have a lot of invoices, you can see our article on how to make GSTR 2A reconciliation with your invoices. You can see a third party video in excel how easily you can reconcile entries on the GST portal with your ITC in books.

A FAQ on Input tax credit in GST

1. Is all credit of input tax charged on the supply of goods or services allowed in GST?

Ans. A GST registered person is entitled to take credit of input tax charged on the supply of goods or services or both to him which are used or intended to be used in the course or furtherance of business. However, this is subject to other conditions and restrictions as specified in the first paragraph.

2. How to take ITC When the goods are received in lots or installments?

Ans. The GST registered person shall be entitled to the credit only upon receipt of the last lot or installment.

3. What happens to the ITC taken by the registered person if he has not paid the invoice along with tax within 180 days from the date of the invoice?

Ans. The amount of ITC will get added to the output tax liability of the person. He needs to pay interest on such amount. However, he can take ITC again after making payment of consideration and tax.

4. Who will get the ITC in ‘bill to’- ‘ship to ’scenario)?

Ans. It is deemed that the registered person has received the goods when the goods have been delivered to a third party in the direction of such a taxable person. Therefore, ITC will be available to the person on whose order the goods are delivered to the third person.

General Queries on ITC in GST

What is Input Tax Credit in GST? The Input tax credit is a tax credit available in GST to the recipient of goods or services when it’s used as inputs to provide further business. Who can claim the ITC on GST? The GST Registered person other than composite dealers can claim the input tax credit. How does the input tax credit work? The supplier pays the GST to the government after raising the invoice to the recipient of goods or services. Later, the recipient of such goods or services who uses these receipts as inputs to provide further taxable supplier claims ITC against its outward supplies. Is input tax credit allowed under reverse charge? Yes How much credit can I claim? You can claim 100% Input tax credit subject to below conditions:

1. The supplier shall pay such tax to the government.

2. You have received the goods or services

3. You have a proper tax invoice from the supplier How Input Tax Credit adjusted in GST? The taxpayer can adjust the input tax credit from its liabilities.

For eg. the liability for the current period is Rs. 100,000/- and the credit you have is Rs. 25000/-. Thus, you need to pay Rs. 75000/- to the govt. (Rs. 100,000 – Rs.25000) after deducting the credit from the total liabilities.

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