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What is input tax credit in GST?

By Finserv MARKETS - Nov 20,2019
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Input Tax Credit Under GST

Goods and Services Tax (GST) is one of the biggest reforms to indirect taxes in the country. The objective of the GST is to create a singular indirect tax system for the entire country. Implemented on July 1, 2017, GST has invited much praise as well as has drawn a lot of flak for hasty implementation and complexity in compliance.

Rules, rates and provisions pertaining to GST have seen many reforms, revisions and changes since inception, and just when it seems that things have settled down, there are new rules and provisions that taxpayers have to comply with.

One of the most path breaking and important provisions of GST reform is the mechanism known as input tax credit (ITC). The rules pertaining to ITC was tweaked recently resulting in increased workload for taxpayers who are burdened with much compliance requirements because of GST.

Though the government may be right in making changes to the ITC to curb fake GST invoices, this recent change in ITC rules have only added to the woes of small and medium business enterprises (SME). SMEs are already fighting a liquidity crisis due to unavailability of business loans from financial institutions and keeping up with constant changes in GST compliance requirements makes things even more difficult for them.

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What is Input Tax Credit?

Input tax credit (ITC) is the difference between the tax you have paid on purchases and the tax you pay on sale of the final product. If your business is under the purview of GST and you are a manufacturer, e-commerce seller, aggregator, e-commerce operator and supplier, you are eligible for ITC.

Input tax credit can be better understood with this simple illustration.

Say for example that you are a manufacturer and you purchased raw materials for making a product from three different vendors and paid total GST of Rs. 300. However, after you created the product, you had to pay a tax of Rs. 450 on selling that product. Since, you have already paid Rs. 300 as input tax on the product, you only have to pay the difference of Rs. 150 now as GST (Rs. 450 – 300 = Rs. 150). So, your input tax credit here is Rs. 300.


Input Tax Credit Under GST

Source: ClearTax

Who can claim input credit under GST?

You must fulfil the following conditions to avail or claim input credit under GST:

  • You must have a tax invoice of your purchases from a registered dealer.

  • In case of the goods received in instalments, credit will only be available after the receipt of the last instalment.

  • You must have received the goods or services.

  • In case the assessee does not pay for the value of the goods/ services or the tax amount within 3 months of invoice and avails input tax credit, the credit will be added to his tax liability along with interest.

  • The supplier must have deposited the tax charged on your purchases to the government as tax or claimed as input credit.

If you have a business and you pay GST on the goods and services received from suppliers, it’s mandatory that your suppliers are GST-compliant as well. Only then you will be able to receive input tax credit.

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What has changed with input tax credit recently?

The new ITC rules are stricter when it comes to availing input credit. As mentioned above, your supplier has to be GST compliant. In case, if there is a mismatch between the details given by you and what the supplier has uploaded to the GST portal, you will only be eligible for 20% of the input credit.

Going forward, GST compliance or non-compliance of your suppliers will have a significant impact on your cash flow. Business will have to ensure that their suppliers are totally GST-compliant before they do business with them. This new rule introduces another set of compliance work on a monthly basis for GST filers.

Previously, businesses could carry out self-assessment of ITC claims on the basis of suppliers’ invoice copy with them and there were no such restrictions on mismatch. However, things have now changed and businesses will have to chase down their vendors every month to timely and correctly upload their invoices.

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Also read all about GST & Components of GST only at Finserv MARKETS.

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