Input Tax Credit: What is ITC in GST?

Updated on 19 Mar, 2024

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The GST system was introduced to infuse convenience and simplicity into the then-existing tax system. The Input Tax Credit in GST is one of the key features introduced to reduce the cascading effect of taxes and adjust business costs with taxes.

Let us learn about the GST input tax credit feature in detail.

What is input tax credit in GST?

Here is understanding the input tax credit meaning simply.

In GST, if you have already paid GST on input, you can reduce your output tax by adjusting it against the output. This adjustment of input GST against the output GST is called input tax credit.

Suppose you are a notebook manufacturing company. The tax on the sale of your final product (notebook) is your output tax. Let us say that it is ₹50,000 in our example.

Similarly, the tax or GST you pay on purchasing your raw materials (like papers, cardboard, binding cloth and more) is your input tax. Input tax is ₹44,000 in our example.

The notebook manufacturer has already paid ₹44,000 as input GST.

Therefore, by claiming the input tax credit of ₹44,000, the notebook manufacturer will only have to pay ₹6000 in taxes.

What is the eligibility for input tax credit?

The input tax credit mechanism is not available for a claim to all businesses. The GST law restricts or blocks some specific input tax credits. Other than the items restricted or exempted, all the other goods and services are eligible for input tax credit. Therefore, one should check the eligible and ineligible input tax credit goods and services for expense calculations.

What items are exempted from input tax credit under GST?

The list of goods and services which are not eligible for input tax credit is as follows:

GST paid on conveyances and motor vehicles. However, input tax credit would be allowed to be claimed if such transportation is used for imparting training, transport of passengers or goods, or such other specified services.
Input GST on beauty products, cosmetics, food and beverages, health services, outdoor catering, and plastic surgery. These items can be eligible for input tax credit claim if the output GST is of the same category or as a part of the composite or mixed supply.
Tax paid on the membership fees of gymnasiums, health and fitness centres and clubs is ineligible.
GST paid on goods or services received by non-resident taxable persons are ineligible for claim. This would be exempted if IGST is payable on purchased goods or services.
Travel benefits extended to the employees or travel or vacation concessions are ineligible as per GST input tax credit rules.
If the registered employees or persons purchase items for their personal consumption, the input tax credit claim on them cannot be adjusted against output tax.
Input GST paid on items confiscated, disposed of as gifts, written-off, lost, stolen, destroyed or received as a free sample are ineligible for an input tax credit.
Life and health insurance, except when mandatorily provided by the employer to employees under law or when adjusting against the same outward tax of the same category or as an aspect of a taxable composite or mixed supply.

What is the input tax credit on capital goods?

There are certain restrictions on availing input tax credits for certain capital goods. These are:

Capital goods purchased for personal use or exclusively for exempt supplies
Capital goods are treated as business expenses and not capitalised in the book of accounts.

Along with these restrictions, certain conditions apply to capital goods’ input tax credit. These are:

Capital goods input tax credit must be reduced by 5 per cent per quarter from the invoice date (assuming its five-year life span).
The tax component cannot be claimed as depreciation under the Income Tax Act 1961 for capital goods.
All capital goods must be capitalised in the book of accounts. Also, they should not be treated as business expenses.

Who can claim the input tax credit in GST?

Any registered individual can avail of input tax credit on inward supplies or availing of goods and services. However, there are certain conditions stated for the registered person.

Possession of a valid tax-paying invoice or any other specified tax document
Should have received the goods or availed the service for the invoice paid
Must have paid tax as a supplier to be eligible for credit
Must have furnished a necessary return
If items are purchased in the way of ‘lots’, a claim can be made only after the final lot is received.
Supplier payment is to be made within 180 days from the invoice date. Failure to do so will result in the addition of the supplier’s output tax liability with suitable interest. However, in this case, the recipient would be eligible to claim input tax credit after completing payment of the invoice to the supplier.

How to make the reversal of input tax credit?

For certain conditions like blocking incoming tax credits or proving personal consumption of purchase, the income tax credit needs to be reversed.

In income tax credit reversal, the input credit earlier utilised would be added to their output credit. This would nullify the input tax credit claimed earlier.

What is the time limit to claim input tax credit?

You can claim input tax credit or debit note within the earlier of the two dates given below:

Date of filing form GSTR-9 annual returns for the concerned financial year
November 30 of the following financial year

How do I check input tax credit in the GST portal?

You can visit the GST web portal and click ‘Electronic Cash Ledger’ to view input tax credit details. Details would be visible for the ‘From’ and ‘To’ periods you have selected.

Conclusion

The Input Tax, Credit or ITC feature, was the significant feature that differentiated GST from the earlier existing indirect taxes. This mechanism of adjusting the input tax against output tax is only available under the GST Act and applies only to GST-registered companies. For input tax credit problems and solutions, you can seek support from registered professionals.

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