Brief Introduction of Input Tax Credit or ITC Scheme Under GST

The meaning of Input Tax Credit (ITC) under GST:

Input Tax Credit (ITC) is credit amount available to the supplier to set off taxes from taxes which is payable on sales as sales tax. All merchants are accountable for output tax on assessable sales in the means of his business.

For example, if any trader purchase one commodity of  118 as  100 basic price and  18 as GST Input, and he sells same for  141.60 as 120 basic prices and 21.60 as GST Output. Then his tax liability will not be  21.60, but  18 will be set off from Outward tax which is . 21.60, so his liability to pay tax will be  3.60 (21.60-18). ITC is not relevant to all sorts of inputs. Every state has its criteria and provisions in this regard and is applicable respectively.


Fundamental Terms Associated to GST Input Tax Credit Scheme:

  • Define Input? Under GST bill, input means goods excluding capital goods used by a supplier during his business to make outward supplies.
  • Input Service?? This term implies any service used by a vendor during his trade to create supplies outwards.
  • Input Tax??  It is a tax foisted on the person when he gets the supply of goods and services for his business use.
  • Electronic Credit Ledger?  It is an electronic record for Input Tax Credit to be kept on the shared portal.
  • Electronic Cash Ledger? It is an electronic cash record to be kept at the universal portal for each taxable individual listed under GST.

Under GST Act, a division of taxes is into three parts:

  1. Integrated Goods and Services Tax (IGST)
  2. Central Goods and Services Tax (CGST)
  3. State Goods and Services Tax (SGST)

Now the question emerges that:

who will be eligible for ITC under GST ????

  1. One who is under GST law except for registration under Composite Scheme
  2. Let’s say an individual with Composition Scheme and switch over to the regular GST scheme.  He shall be fitted to take Input Tax Credit (ITC) under GST in respect of “goods kept in stock” on the day immediately leading the date when he becomes accountable to pay tax as a regular taxpayer.

who will not be eligible {u/s 16(9)} for ITC under GST ??

  • You cannot profess for ITC for goods and services used for private goals.
  • If you have collected goods & services under a deal which ends up in consumption of immovable assets other than plant and machine.
  • If you have given tax under GST composition scheme on Goods and Services.
  • Or you have used goods and services to create immovable property other than plant and machines, and such property is not transferable.
  • Goods and services which have been used by workers for their use.
  • If the discount has been demanded on the price of capital goods, then these are not fit for Input Tax credit.

Requirements to claim ITC under GST:-

  1. Invoice with GST: this is an essential prerequisite for ITC, A GST tax invoice should be retained to claim credit. In the absence, the department will not allow you to take credit for the same.
  2. Receipt of Goods and Services: To claim a refund, goods must have been received, You can not claims ITC if you did not receive Goods.
  3. The return filed by supplier: You will be entitled to ITC only if your vendor suggested your transaction in his GSTR1. If he didn’t do so, check your portal and imply your supplier to correct his detail to claim ITC.

The time frame for Availing GST Input Tax Credit:

You can see below the various time frames in which one can ask for inputs credit for stock or semi-finished goods/finished goods.

Input Tax Credit time limit

Now, how to adjust these input credits in output taxes??

Earlier, it was easy as subtract input tax from production tax and generate your liability to pay tax. But GST law is very particular about adjusting Input credit and adjustment from which tax.

As GST is not a single tax, there are three taxes (IGST, CGST, SGST). So how to change IGST Input, CGST Input, and SGST Input? I am going to explain in next paragraph.


How to utilize IGST Input tax credit under GST?

  • First, utilize it towards output IGST.
  • If remaining, then towards output CGST.
  • And if still remains, then adjust towards payment of SGST output.

         Note: You cant utilize CGST Input credit to adjust SGST.

How to utilize SGST Input tax credit under GST?

  • First, use it towards payment for SGST.
  • Then use it for payment of IGST

          Note: You cant Utilize SGST towards CGST.

How to utilize CGST Input tax credit under GST?

  • First, utilize it towards output CGST
  • Then use it for payment of IGST
  • Followed by payment for SGST if remaining.

 Matching Mechanism for Monitoring of ITC Scheme:

To control the duplication in ITC  claiming, a matching device is there. It ensures that inward supplies returns filed by the customer match outward stocks return filed by the vendor.

The matching mechanism also aids in matching ITC applications with customs paid where certified taxable person imports goods.
Any inconsistency which arises after verification leads to a warning to both parties so that they can make necessary changes within the time frame.

This is all about Input tax credit and its adjustment in GST :)) if you want to read further:

Brief Idea About GST Composition Scheme

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