Step-by-Step Guide for ITC Claims

 

What is Input Tax Credit (ITC)?

Input Tax Credit is one of the main features of Goods and Services Tax (GST). It aims to remove the cascading effect of taxes and lower the cost of running a business.

Input Tax Credit refers to the GST a registered person pays when buying goods and services. The buyer uses such purchases to grow and develop the business. The ITC can help offset the GST liability on the goods or services the person registered under the company supplies.

For example, a manufacturer buys Rs 10,000 raw materials and pays 18% GST of Rs 1,800. They are then eligible to claim an ITC of Rs 1,800. Say, goods worth Rs 15,000 were sold, and GST of Rs 2,700 was collected. The ITC of Rs 1,800 can be used to set off, and only Rs 900 needs to be paid as GST. By this mechanism, effectively only the value additions in the goods are taxed to GST.

Eligible and Ineligible Input Tax Credit Claims Under GST

It is not possible to get all ITC claims in GST. Some of them are blocked and restricted under the GST law.  

Here are some examples of ineligible input tax credits:

• GST that was paid on goods stolen, destroyed, disposed of as a gift or free sample, lost, or written off.

• GST paid on membership fees for the fitness centre, club, and gym.

• GST paid on goods or services bought for personal use by the registered person or their employees.

• GST paid on vehicles and other conveyances.

• Exception: When used for transporting goods, training, or passengers.

• GST was paid on food and drinks, health services, outdoor catering, cosmetic and plastic surgery, and beauty treatment.
  Exception: When used to make a taxable outward supply or as part of a composite or mixed supply.

• GST that was paid on the travel benefits given to employees on vacation. These may include home travel concession or leave. 

GST paid on expenditures done towards Corporate Social Responsibility by corporates.

Who can Claim Input Tax Credit Under GST? 

ITC claims can be made by any registered person. It is claimable on the inward supply of goods and services or both. Taxpayers can use the GST calculator to understand the claim process and check their eligibility.

Conditions to Claim Input Tax Credit Under GST

To be eligible for your ITC claims, one must fulfil the following conditions:

• Valid Tax Invoice:

  The registered individual must have a valid tax invoice to claim the credit. They can also use any other tax-paying document as may be specified .

• Receipt of Goods or Services:

  The credit can be claimed after the individual has received the desired goods and services. This also includes situations where the shipping address and billing address are different.

• Actual Tax Payment:

  For the credit to be claimable, by the recipienttax amount must have been by paid supplier.
  

• Return Filing:

  The individual should have filed the required returns to claim the input tax credit. It is important to submit a summary return of outward and inward supplies.

• Lot-based Eligibility:

  In case inputs are received in lots, the credit can be claimed only upon receipt of last lot or installment .

• Timely Payment to Supplier:

  The value of the goods or services, along with tax, must be paid to the supplier within 180 days from the invoice date. In case of any default, the credit amount will be added to the recipient’s output tax liability, with interest. Once the payment is made, the credit can be claimed again.

Time Limits for Claiming ITC Under GST 

The time limit for ITC claims under GST is one of the given two dates, whichever is earlier:

• The due date to file the annual return for that financial year or

• 30th November of the following  financial year to which such invoice pertains.
  

For example, ideally an individual can seek an ITC claim for FY 2022-23 before filing the October 2023 return or the annual return for FY 2022-23, whichever is earlier.

How to Claim Input Tax Credit (ITC) Under GST? 

If you are a registered person seeking ITC claims in GST, it is essential to follow the steps given below to answer the question, “how to claim ITC in GST”:

• Use the GSTR-2B to verify the input tax credit details. GSTR-2B is an auto-generated statement that reflects the returns filed by the suppliers.

• Match the invoice-wise ITC as per books of accounts & that reflected in GSTR-2B

• Declare the output tax liability and input tax credit details matched in the previous step while filing the monthly return in form GSTR-3B.

• Follow up with your suppliers for mis-matched ITC, if any.

• Reconcile  such differences & claim the same in the next month’s return 

• Ensure that if any excess input tax credit is claimed it shall be reversed with the interest as applicable.

Claiming the input tax credit helps to reduce the tax burden on the suppliers and businesses. It also allows a continuous flow of credit in the GST regime. By following the steps and rules for claiming the input tax credit, you can get the benefits of GST and improve your profits and cash flow. 

Documents Required for Claiming Input Tax Credit (ITC)

The following documents are required for successful ITC claims:

• Supplier’s Invoice:

  This is the invoice issued by a supplier for purchasing goods or services you made.
  

• Bill of Supply:

  This document is issued in case of supplies that are exempt from GST.

• Supplier’s Debit Note:

  The supplier of goods or services issues a supplier’s debit note. It is used to update the details or correct any errors.
  

• ISD Document:

  If the registered person has opted for  Input Service Distributor scheme, the credit notes and invoices provided by the ISD can be used to avail the ITC..
  

• Bill of Entry:

  A Bill of Entry or similar document can be used for imported goods.
  

GST Rules To Claim Input Tax Credit

Businesses need to follow some rules for ITC claims. These rules are as follows:

• The buyer should have a valid debit note, tax invoice, or some other prescribed document issued by the dealer.

• The buyer should have received the goods or service. If the product is received in installments, the credit should be claimed  upon receipt of last installment.
  

• General insurance, maintenance and repair with respect to aircraft, motor vehicles and vessels.
  

• The supplier should pay the due tax to the government for recipient to claim an input tax credit
  

• Motor vehicles for transporting people having a seating capacity of more than 13, including the driver, aircraft and vessels, money for, or by a financial institution or banking company.
  

• The supplier should have filed GST returns. GST rules allows you to claim input tax credit on purchases you make. This is only allowed if the supplier is compliant with GST norms and has paid the tax collected from the buyers.
  

• To claim ITC, the buyer should make the payment for the purchase, including tax, within 180 days of the invoice being issued. If the buyer fails to do so, the amount of credit claimed will be added to his output tax liability. After the taxpayer pays the amount due to the supplier, they can claim ITC.
  

• ITC  on debit notes and invoices as issued by supplier where the details for such debit notes and invoices are reflecting in GSTR 2B 

Claiming and Reconciling ITC Under GST with Illustrations

Under the Goods and Service Tax (GST), there are three types of taxes: IGST, CGST, and SGST.

• Central Goods and Services Tax (CGST):

  This tax is collected by the Central Government and levied on transactions within same state only.
  

• State Goods and Services Tax (SGST):

  This tax is collected by the State Government and levied on transactions within  samestate only.
  

• Interstate Goods and Services Tax (IGST):

  This is a single tax collected by the Central Government. It is levied on transactions between states.
  

These tax credits can be used to offset each other.

• CGST credit can be used to offset the liability arising from it. In case there is CGST credit left over, it can be used to offset IGST liability next.
  

• SGST credit can be used to offset the liability arising from it. In case there is SGST credit left over, it can be used to offset IGST liability next.
  

• IGST credit can be used to offset the liability arising from it. If IGST credit is left over, it can offset the CGST liability and the SGST liability.

Credits are reconciled by matching the buyer’s transactions with the seller's. This helps the Tax Department verify each transaction from both parties’ perspectives. 

For example:

MK Kitchen Knives purchased 10 tonnes of steel from GH Steelware Inc. Both parties are registered for GST. After reconciling both parties' transactions, the recipient can claim the ITC.

• GH Steelware Inc. ( the seller) will file the GSTR-1 report.

• MK Kitchen Knives (the Purchaser) will be able to see all transaction details inits  GSTR-2B, which will be auto-generated using GSTR-1.Once the seller files their monthly returns, MK Kitchen Knives will be eligible to make the ITC claim.

FAQs on Step-by-Step Guide For ITC Claims

How to claim GST input tax credit?

If you are a registered person seeking ITC claims under GST, it is vital to keep in mind the steps given below:

• Use the GSTR-2B to verify the input tax credit details. GSTR-2B is an auto-generated statement that reflects the returns filed by the suppliers.

• Match the invoice-wise ITC as  books of accounts & that reflected in GSTR-2B 

• Declare the output tax liability and input tax credit details matched in the previous step while filing the monthly return in form GSTR-3B.

• Follow up with your suppliers for mis-matched ITC, if any.

• Reconcile  such differences & claim the same in the next month’s return 

• Ensure that if any excess input tax credit is claimed it shall be reversed with the interest as applicable.

What are the rules or eligibility criteria for ITC claims?

As per the input credit mechanism, one needs to fulfil several conditions. These are:

• Ensure you are a registered taxpayer.

• The registered person must have a valid tax invoice or a specified tax-paying document.

• The registered person should have received the goods or services they paid for.

• The seller should have paid the tax amount to the government.

• The necessary return should be filed.

• The final lot of inputs should have been received for lot-based goods.

• The supplier should be paid within 180 days from the date of invoice.

Can ITC be claimed after 2 years?

The input tax credit can be claimed for debit notes and tax invoices less than a year old. The timelines for the same will be earlier of:

• Due date to file the annual return for the financial year.

• November 30 of the succeeding financial year.

How do I claim my ITC balance?

ITC can be claimed by meeting the required eligibility criteria, maintaining tax invoices and debit notes records, filing the necessary tax returns, and being GST compliant.

ARN - INT/ED/03/24/10442