Input Tax Credit

Tax officials are likely to investigate the high use of input tax credit (ITC) to set off tax liability by companies, due to concerned about a fall in GST revenues. At the meeting of the Group of Ministers (GoM) set up by the GST Council, the question of a high ITC was raised in order to investigate the reasons for the revenue shortfall faced by a large number of states.

Ideally, the ITC available should not result in a loss of revenue, but it may be possible for unscrupulous firms to exploit the provision by creating false invoices solely to obtain tax credit.


What is the ITC (Input Tax Credit)?

> ITC is the tax that a company pays on a transaction and that it can use when making a profit to reduce its tax liability. In other words, by claiming loans to the sum of the GST paid on acquisitions, companies can reduce their tax liability.

> Goods and Services Tax (GST) is an integrated tax mechanism in which any transaction made by an undertaking should be balanced by a sale made by another undertaking. This makes the transfer of credit a smooth process through the entire supply chain.


How does ITC function?

> When a trader sells a good to consumers he collects GST based on the HSN of the good sold and the place of destination. Let us assume that the MRP of the good is INR 1000 and the rate of applicable GST is 18%. The consumer will therefore, pay a total of INR 1180 for the good which includes a GST of INR 180. Without ITC, the trader will have to pay INR 180 to the government. With input tax credit or ITC, the trader can reduce the total tax that it will have to pay the government. This is how it works.


Who can demand Input Tax Credit?

A individual registered under GST can assert ITC only if he fulfils all the conditions as prescribed:

> A dealer should have a tax invoice in his hands.

> The products / services referred to have been received

> There have been returns filed.

> The tax charged was paid by the supplier to the government.

> If depreciation has been stated on the tax part of a capital good, no ITC will be permitted.

> An ITC can not be asserted by an individual registered under the composition scheme under GST.


Input Tax Credit reversal:

Only products and services for business purposes may be used for the ITC. ITC can not be asserted if they are used for non-business (personal) reasons, or for making exempt supplies. Apart from these, the ITC will be reversed in the following situations:

> 180-day non-payment of invoices- For invoices that have not been paid within 180 days of issue, ITC will be reversed.

> Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.

> Inputs partly for business purpose and partly for exempted supplies or for personal use

– This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.

> Capital goods partly for business and partly for exempted supplies or for personal use

– This is similar to above except that it concerns capital goods.

> ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.


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