Goods and Services taxes (GST) has been one of the biggest transformation in India. However, we have that one thing in mind that is making a bit confusion in the concept of the whole GST thing. That is none other than the “Input Tax Credit In GST” i.e the mechanism of the input credit tax under GST.
In simple words it is stated as: it is the time when you pay the taxes on sales, you reduce the tax that you have already paid on the inputs and in final you pay the balance amount.
- 1 What is an Input Tax Credit?
- 2 The Mechanism of Input Tax Credit
- 3 How To Claim Input Credit under GST?
- 4 Conditions for claiming the Input Tax Credit
- 5 How is Input Credit Tax calculated?
- 6 What is the Time Limit To Avail GST Income Tax Credit?
- 7 Documents and Forms That Are Required To Claim Input Tax Credit
- 8 Conclusion
What is an Input Tax Credit?
The Input tax credit is defined as the tax that is paid after the reduction in the taxes paid on the input from the taxes to be paid on the output. When any supply of services are supplied to a taxable person, the GST is charged and this is called as the Input Tax.
This concept is not entirely a new thing, as it already existed under the pre-GST taxes regime which includes the service tax, VAT, excise duty etc. Now the scope has been widened under GST.
Earlier, it was a quite rough situation in claiming the input tax credit for the Central Scales, Luxury Tax, Entertainment Tax and other taxes and the manufacturers and the service providers could not claim that under the Central Excise Duty.
During the pre-GST cycle, the cross-credit of VAT against the service tax and vice-versa was not allowed. But under the GST, since the taxes are incorporated into one, so there will be no restrictions in claiming out the input tax credit.
The conditions to claim the Input Tax Credit under GST is itself a very critical and fussy activity to adopt. It’s quite demanding for every business to settle down the tax liability. The tax credits cannot be applied to all the types of inputs. It has a different set of rules for every state and country. The input tax credit is viable to the dealer who purchases the goods for reselling purpose. Overall, it is stated that the Input Tax Credit acts as a backbone for the GST.
For more better understanding let us quote the concept of the Input Tax Credit with an example:
Let us say that a manufacturer manufactures a product. The final tax to be paid for the product is Rs 500/-. The purchase tax paid is Rs 300. So the input credit you claim is Rs 300. Therefore, the final tax amount you pay is Rs 200.
The Mechanism of Input Tax Credit
The Input Credit Mechanism is experienced when you are under the GST Umbrella. That means that if you are a manufacturer or a supplier or an agent and if you are registered under the GST Act then you are eligible to claim the input credit for the tax paid by you on your purchases.
How To Claim Input Credit under GST?
For claiming an Input Credit Tax, one must satisfy all the conditions that evolve around the Input Credit under GST. Following are some of the conditions that are meant to be entitled to the Input Credit under the GST Scheme
- One must be a registered taxable person. He or she must have issued themselves under the GST Scheme.
- One can claim the Input Credit if the person has received the goods and services that are meant for the business purpose.
- The Input credit tax can be claimed on exports/zero supplies and are taxable. The zero supply refers to the goods or the items that are taxable under GST but the Rate of Tax is considered to be Nil.
- For a registered taxable person, if the Constitution changes due to certain reasons such as the merging of the business, or the sale or transfer of the business then the Input Tax Credit which had left unused can be transferred to the merged, sold and transferred business.
- One can credit the Input Tax Credit in his Electronic Credit Ledger, in a temporary manner on a common portal called model GST Law.
- The various documents that are required for claiming the Input Tax Credit include Debit note issued by the registered dealer, tax invoice, supplementary invoice issued by the registered dealer.
- One must keep the actual receipt of the Goods and the services to claim the Input Tax Credit.
- One must pay the input cash through the Electronic Credit/ Cash Ledger only.
- All the GST Returns such as GST-1, 2, 2A, 6, 6A, 7, 7A needs to be filed.
- If the goods or received in bulk receipt, then one should claim for the Input Tax Credit if the final lot has been received.
Conditions for claiming the Input Tax Credit
The Input Credit Tax is Unavailable for the certain cases and conditions
- If the goods and services or obtained for the personal use.
- In the case of the Goods and services acquisition, on a contract which can lead to a reduction in the immovable property apart from the plant and the machinery.
- If one has paid tax under the GST composition Scheme for the goods and services received.
- In the case where employees have used the goods and services for the personal use.
- If the cost of the capital goods depreciation is claimed, then the Input Tax Credit cannot be claimed.
How is Input Credit Tax calculated?
To understand how the Input Tax Credit is calculated we need to go through a simple layman example
Let us consider that you have a business. the product or the service that you sell make a hit with an 18% of the tax. You use the input services or goods during your business. The tax due from you can be adjusted with the taxes that you have already paid on the purchase of such inputs. The manufacturers add the taxes only for the value addition and not for the total product value.
The recent report says that the GST will be applied on almost all the goods and services that we use or consume in our day to day life. There are five different GST rates that are added- 0%, 5%, 12%, 18% and 28%. Let us consider a steel utensil manufacturer who manufactures steel utensils such as spoons, plates, bowls etc. Let us assume that the manufacturer bought the raw products worth Rs 500/-. the raw steel that he purchased for making a pressure cooker and Rs 100/- worth of other raw materials that is required for the making of the pressure cooker. Let us consider that the GST rate of the steel is 18%. Assume that the GST he paid is 28% for the other raw materials. Thus the manufacturer has paid Rs 28/- in total for the raw materials and Rs 90 on the raw steel which he uses as the input source. So the total input tax paid by the manufacturer is Rs 118/-
Now after considering the cost of manufacturing a steel pressure cooker using the raw materials and including the decent profit, the manufacturer hence decide to sell the pressure cooker at the rate of INR 800 + GST.
Now let us assume that the steel utensils attract a GST of 18%. Now the tax on it will be Rs 144 as GST on sale from the distributor. The manufacturer has paid Rs 118 towards GST during the purchase of the raw materials. Thus, out of Rs 144 of GST the manufacturer can now claim a credit of Rs 118 which he has already paid towards the GST for the inputs and the difference in the deposit of Rs 26 with the Government. This tax credit is available at all the stages, retailers, and distributors and can claim the Input Credit tax.
What is the Time Limit To Avail GST Income Tax Credit?
The Income Tax Credit can be availed by a registered taxable person in a specific manner and within a specific time frame. Below mentioned is the table where different situations or mentioned wherein the inputs or claimed for semi-finished or stock or fully-finished goods and services.
|Situation||ITC claims for fully or semi finished goods and stock|
|If the person has applied for the registration or is liable to the registration||The Day from when he is subjected to pay taxes|
|When the person takes a voluntary registration||The registration Day itself|
|When a registered taxable person stops paying taxes in composition scheme||When he is liable to pay tax normally u/s 7.|
These situations can be claimed only if he does not exceed one year from the tax invoice date of issue related to the supply.
Documents and Forms That Are Required To Claim Input Tax Credit
Below mentioned are the following documents that or required for claiming the Input Tax Credit
- Supplier issued invoice for supplying both goods and services under the GST Law.
- The Bill of Entry- it is a number of the goods entered in the list of exports and imports detailing the merchant, quantity, and quality of the goods and the origin or the destination.
- A debit note issued by the supplier to the recipient in case of tax payable.
- A Credit Note issued by the Input Service Distributor.
- An invoice issued like the Bill of Supply under certain conditions instead of tax invoice.
- The above documents are prepared as per the GST Invoice Rules. These rules or furnished while filing a GSTR-2 Form. If any of the above documents or forms are not presented correctly can lead to the failure or rejection of the request.
The main objective of introducing the Input Tax Credit is to bring down all the overall taxes that or charged on the product. Now since the input tax credit will be available to the seller at each stage, the final cost of the product must come down or get reduced. If the input tax credit mechanism runs efficiently then the customers may experience the cost of reduction.
Maheshwari concluded stating that “this will benefit the ultimate consumer as the cost of production or the services for the service providers, traders or the manufacturers will get reduced due to the availability of the more input tax credit and this will help in bringing down the price of the goods and the services to that extent”.
To know more about this new tax GST and the indirect taxes that are merged under GST. Check this link:https://rupeenomics.com/different-taxes-india-direct-indirect-tax/