Input Tax Credit, Eligible and Ineligible Input Tax Credit

04/12/2023 1 By indiafreenotes

Input Tax Credit (ITC) is a key feature of the Goods and Services Tax (GST) system, allowing businesses to offset the taxes they paid on inputs against the taxes they collect on their outputs. This mechanism is designed to avoid the cascading effect of taxes and promote the concept of a value-added tax.

Input Tax Credit is a pivotal aspect of the GST system, ensuring that businesses are not burdened with the tax on tax. Understanding the eligibility criteria, calculation methodology, and the distinctions between eligible and ineligible ITC is essential for businesses to optimize their tax liabilities and comply with GST regulations. As the GST framework evolves, staying informed about updates and seeking professional advice are crucial for businesses to effectively manage their indirect tax obligations related to Input Tax Credit.

  • Input Tax Credit: An Overview

In the GST framework, Input Tax Credit is a mechanism that allows businesses to claim a credit for the taxes paid on their purchases of goods and services. The credit can be utilized to offset the GST liability on the supply of goods or services. This ensures that taxes are levied only on the value addition at each stage of the supply chain, preventing the taxation of taxes.

Eligibility Criteria for Input Tax Credit:

Several conditions must be met for a business to be eligible for Input Tax Credit:

  1. Possession of Tax Invoice:

The business must possess a valid tax invoice or a similar prescribed document evidencing the supply. Without proper documentation, ITC cannot be claimed.

  1. Goods or Services Used for Business:

The goods or services on which ITC is claimed must be used for the furtherance of business. Personal or non-business use does not qualify for ITC.

  1. Receipt of Goods or Services:

The recipient must have received the goods or services. ITC cannot be claimed based on mere payment or booking of an invoice; actual receipt is essential.

  1. Payment of Tax to the Government:

The supplier of goods or services must have deposited the GST with the government. ITC cannot be claimed if the supplier has not discharged their tax liability.

  1. Filing of GST Returns:

The recipient must have filed their GST returns, ensuring proper compliance with the regulatory requirements.

Calculation of Input Tax Credit:

The calculation of Input Tax Credit is based on the formula:

ITC = GST paid on inputs − GST paid on output

This implies that the GST paid on purchases (inputs) can be offset against the GST collected on sales (outputs), resulting in a net liability.

Eligible Input Tax Credit:

  1. GST on Purchases for Business Use:

ITC is eligible on the GST paid for goods or services purchased for business use. This includes raw materials, services used in the production process, etc.

  1. Input Services:

GST paid on input services, such as legal services, accounting services, or any other service used for business operations, is eligible for ITC.

  1. Capital Goods:

ITC is eligible on the GST paid for capital goods, including machinery and equipment, used in the business.

  1. Inward Supplies from Unregistered Dealers:

ITC can be claimed on inward supplies from unregistered dealers if the aggregate value of such supplies does not exceed Rs. 5,000 in a day.

  1. Credit Notes:

If a supplier issues a credit note for any reduction in the value of the supply, the recipient can claim ITC for the corresponding reduction in GST.

Ineligible Input Tax Credit:

  1. Blocked Credits:

Certain categories of goods and services fall under the list of blocked credits, and ITC cannot be claimed for these. Examples include food and beverages, health services, cosmetic and plastic surgery, etc.

  1. Motor Vehicles:

ITC is not available for motor vehicles, except when they are used for specified purposes like transportation of goods, providing taxable services of transportation, or training.

  1. Works Contract Services:

ITC is restricted on works contract services when they are used for the construction of an immovable property.

  1. Goods or Services Used for Personal Consumption:

If goods or services are used for personal consumption or non-business purposes, ITC cannot be claimed.

  1. GST Paid Under Composition Scheme:

ITC is not available for GST paid under the Composition Scheme. Businesses opting for the Composition Scheme cannot claim ITC on their purchases.

Challenges and Compliance Issues:

  1. Apportionment of Credit:

Businesses engaged in both taxable and exempt supplies face the challenge of apportioning the credit between the two categories to ensure accurate ITC claims.

  1. Reverse Charge Mechanism:

Under the reverse charge mechanism, the recipient is liable to pay GST, and ITC can be claimed accordingly. However, compliance challenges may arise in tracking and accounting for such transactions.

  1. Change in Business Use:

If there is a change in the use of goods or services from business to personal or vice versa, businesses may face challenges in appropriately adjusting ITC claims.