Input Tax Credit in India

The primary goal of introducing input tax credit under GST is to reduce the effect of cascading taxation that existed under the prior VAT regime.

Input Tax Credit in India

Since 2017, the Goods and Services Tax (GST) has been regarded as one of the most significant tax reforms in India. GST combines all of the country’s indirect taxes, and analysts believe it will help the economy thrive, enhance tax collection, and increase transparency. GST has the potential to revolutionise enterprises. GST has abolished state borders, and its rates make it easier to pay less tax on tax occurrences, as well as uniform tax rates across the country.

The concept of credit and availing benefits out of it is such a relieving concept. To understand this well we can think of how we redeem our credit points on our loyal retail brands after reaching a minimum threshold of billing amount. Similarly, an Input Tax credit works more or less in a similar manner.

The primary goal of introducing input tax credit under GST is to reduce the effect of cascading taxation that existed under the prior VAT regime. In the case of GST, the tax is only applied once to each commodity or service. The input tax credit, or ITC, is one of the primary methods that the GST regime uses to eliminate cascading taxes.

Meaning

The credit manufacturers obtain for paying input taxes on inputs used in the manufacturing of products is known as an input tax credit. Similarly, if a merchant purchases items for resale, he is entitled to an input tax credit.

On taxable sales made in the course of his business, all dealers are subject for output tax. He can offset the output tax against the input tax already paid by using input tax credit. The input tax credit does not apply to all inputs. In this regard, each state has its own set of rules and regulations that must be followed.

Working of Input Tax Credit

The buyer receives credit for input tax paid at each stage of the supply chain, which they can use to offset the GST owed to the federal and state governments. Let’s use the example of a company named YKR Fabrics, which sells custom-made home fabrics, to better comprehend this notion.

At a GST rate of 12.5 percent, they buy silk fabric and muslin valued Rs. 2000 from a merchant. As a result, they pay a Rs. 250 input tax.

The bespoke fabric is currently sold for Rs.4000, plus a 12.5 percent output tax, for a total selling price of Rs. 4500 (Rs. 4000 + Rs. 500).

Thus YKR Fabrics owes the government tax as follows: Output tax – Input tax credit = Rs. 500 – Rs. 250 = Rs. 250

Legal Provisions[1]

It means the Central tax, State tax, Integrated tax or Union territory tax charged on any supply of goods or services or both made to a registered person but does not include the tax paid under the composition levy.

It shall also include:-

(a) The integrated goods and services tax which is charged on import of goods

(b) The tax payable as per section 9(3) and (4) of the CGST Act

(c) The tax payable as per section 5(3) and (4) of the IGST Act

(d) The tax payable as per section 9(3) and (4) of the respective SGST Act

(e) The tax payable as per section 7(3) and (4) of the UTGST Act.

The different provisions relating to the INPUT TAX CREDIT (ITC) are found in Chapter V of the CGST Act (Section 16-21) and the CGST Rules. The ITC provisions of the CGST Act apply to the IGST Act as well. The provisions are applied under Section 20 of the IGST Act. The following are some of the topics discussed in the many sections:

Section 16: Eligibility and Conditions for taking Input tax credit

Section 17: Apportionment of credit and blocked credits

Section 18: Availability of Credits in Special Circumstances

Section 19: Taking input tax credit in respect of inputs and capital goods sent for job work.

Section 41: Utilization of ITC

Section 42: Matching, Reversal and Reclaim of ITC

Eligibility to claim ITC

1. Only those who have a GST registration and have filed the GSTR 2 returns are eligible for the input tax credit.
2. The tax invoice or debit note issued by the input or input services supplier should be in the dealer’s possession.
3. It is expected that the goods or services, or both, be received.
4. The GST payment for such a supply has been made by the supplier to the government.
5. When products are delivered in instalments, the input tax credit is only available when the last lot is delivered.
6. If depreciation on the tax component of a capital good has been claimed, no input tax credit is permitted.

Documents to avail ITC?

In order to claim an input tax credit, you’ll need one or more of the following documents:

1. As a supplier of goods/services, you must issue an invoice.
2. The recipient receives a debit note from the supplier (if applicable)
3. Bill of lading
4. Bill of Materials (maybe a replacement for tax invoice in certain cases)
5. As per GST invoicing guidelines, an input service distributor (ISD) issues a credit note/invoice.
6. A bill of supply is a document provided by a supplier of products or services.
7. When filing GST returns using GSTR-2 to apply for ITC, the required document(s) must be provided.

Input Tax Credit Issues and Challenges

The GST regime’s compliance structure is putting business units in a difficult position. Small and low-credit-worthiness businesses have a difficult time. According to India Rating Research, due to the Input Tax Credit and the hike in the tax rate from 15% to 18%, there will be a Rs. 50,000 crore blockage for the first two months, which could result in a temporary shortage in cash flows to the firms.

It would be simple to manage the situation for a major corporation with a good credit profile. It is also predicted that if the average VAT rate is 14%, one lakh crores of these enterprises’ Input Tax Credit will be blocked.

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[1] Available Here

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