Input Tax Credit (ITC), Eligibility and Conditions for taking Input Tax Credit

India’s Goods and Services Tax (GST) introduced in 2017, replaced the previous complex system of indirect taxes with a single unified tax. The new system has resulted in a simpler and more transparent tax regime that has significantly reduced the compliance burden for businesses. One of the key features of the GST is the input tax credit (ITC) mechanism, which allows taxpayers to claim credit for the tax paid on their purchases.

Meaning of Input Tax Credit (ITC):

Input tax credit (ITC) is the credit that a registered taxpayer can claim for the tax paid on the purchase of goods and services that are used in the course or furtherance of their business. The ITC is available for the tax paid on purchases of goods and services used for the production or supply of taxable goods or services. The credit is available only if the purchase is used for the business and not for personal use.

For example, if a manufacturer purchases raw materials worth INR 1 lakh and pays a GST of INR 18,000, they can claim an ITC of INR 18,000. The ITC can be used to offset the output tax liability, which is the tax payable on the supply of goods and services.

Conditions for Claiming Input Tax Credit (ITC):

• The taxpayer should be registered under the GST regime.
• The goods or services on which the ITC is claimed must be used for the business and not for personal use.
• The taxpayer should possess a tax invoice or other prescribed document such as a debit note, credit note, or a bill of supply.
• The supplier of goods or services should have filed their GST returns and paid the tax due to the government.
• The taxpayer should have received the goods or services.
• The taxpayer should have paid the tax due to the supplier of goods or services.
• The taxpayer should have furnished their GST returns.
• The taxpayer should not have claimed the ITC more than the actual tax paid on the purchase of goods or services.
• The taxpayer should not have used the goods or services for exempt supplies or for personal use.
• The taxpayer should have furnished their GST returns for the relevant period.

Types of Input Tax Credit (ITC):

There are three types of input tax credit (ITC) under the GST regime in India:

Input Tax Credit on Inputs:

Input tax credit (ITC) on inputs refers to the credit that a registered taxpayer can claim for the tax paid on the purchase of raw materials, goods, or services that are used in the course or furtherance of their business. The ITC on inputs is available for the tax paid on purchases of goods or services used for the production or supply of taxable goods or services.

Input Tax Credit on Input Services:

Input tax credit (ITC) on input services refers to the credit that a registered taxpayer can claim for the tax paid on the services used in the course or furtherance of their business. The ITC on input services is available for the tax paid on services used for the production or supply of taxable goods or services.

For example, a manufacturer can claim an ITC on the tax paid on the maintenance services of machinery used in the production process.

Input Tax Credit on Capital Goods:

Input tax credit (ITC) on capital goods refers to the credit that a registered taxpayer can claim for the tax paid on the purchase of capital goods such as machinery, equipment, or furniture that are used in the course or furtherance of their business. The ITC on capital goods is available for the tax paid on the purchase of capital goods used for the production or supply of taxable goods or services.

The ITC on capital goods can be claimed in full in the year of purchase or in part over the useful life of the asset. The useful life of the asset is determined based on the provisions of the Income Tax Act, 1961.

For example, if a manufacturer purchases machinery worth INR 10 lakhs and pays a GST of INR 1.8 lakhs, they can claim an ITC of INR 1.8 lakhs. The ITC can be claimed in full in the year of purchase or in part over the useful life of the asset.

Restrictions on Input Tax Credit (ITC):

The GST law provides for certain restrictions on the input tax credit (ITC) that can be claimed by the registered taxpayers. These restrictions are as follows:

• Blocked Credit: The GST law restricts the input tax credit (ITC) on certain goods and services, which are known as blocked credits. These include goods or services used for personal purposes, goods or services used for non-business purposes, goods or services used for exempt supplies, and goods or services used for the composition scheme.
• Ineligible Credit: The GST law restricts the input tax credit (ITC) on certain goods and services, which are known as ineligible credits. These include goods or services used for the construction of immovable property, goods or services used for the supply of exempt goods or services, and goods or services used for non-taxable goods or services.
• Time Limit: The input tax credit (ITC) cannot be claimed after the due date for furnishing the GST return for the month of September following the end of the financial year to which such invoice or debit note relates or the actual date of filing of the annual return, whichever is earlier.
• Reversal of Credit: If the goods or services on which input tax credit (ITC) has been claimed are subsequently found to be used for non-business purposes or exempt supplies, the input tax credit (ITC) claimed on such goods or services must be reversed along with interest.
• Mismatch in GSTR–2A: If the input tax credit (ITC) claimed by the registered taxpayer in their GST returns does not match with the details uploaded by the supplier in their GSTR-1 and GSTR-2A, then the input tax credit (ITC) claimed may be disallowed.