Input tax credit in GST – A beginners guide to claim ITC

Under our earlier VAT legislation, input tax credit (ITC) of inputs and capital goods in transactions within the state was allowed. Inputs and capital goods coming into the state from outside the state on which central sales tax (CST) was paid, not allowed as input tax credit. There were also ITC issues in CENVAT credit rules, 2004. These types of issues in earlier input tax credit structure resulted in cascading of taxes which lead to increase in cost of goods and services. Therefore, the goods and services tax law was introduced in the year 2017 to promise seamless input tax credit on goods and services across the country.

Input tax credit or ITC is considered to be the lifeline of the new GST regime.

Under GST regime, section 16 to 21 of the CGST Act, 2017 and input tax credit rules prescribed the main provisions of ITC. Identical provisions can also be found in state laws and IGST Act.

Definition of relevant terms related to claim of input tax credit under GST law

Here are few relevant definitions of central goods and services tax act, 2017 to understand the provision of input tax credit better.

As per section 2(59), input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(19), capital goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

As per section 2(60), input service means any service used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(62) and 2(63), input tax credit means credit of the central tax (CGST), state tax (SGST), integrated tax (IGST) and union territory tax (UGST) charged on any input supply of goods or services or both made to the registered taxpayer and includes-

  • IGST charged on import of goods;
  • Reverse charge of CGST (tax payable U/S 9(3) and 9(4) of CGST Act); or
  • Reverse charge of IGST (tax payable U/S 5(3) and 5(4) of IGST Act); or
  • Reverse charge of SGST (tax payable U/S 9(3) and 9(4) of SGST Act); or
  • Reverse charge of UGST (tax payable U/S 7(3) and 7(4) of UTGST Act),

but does not include tax paid under composition levy.

Entitlement of registered taxable person to claim input tax credit

As per section 16(1) of CGST Act, every registered taxable person is entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business. The total amount of credit shall be credited to the taxpayer’s electronic credit ledger.

Which means, a registered taxable person is only entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. Intention to use goods and/or services in the course of furtherance of business will also qualify for availing ITC. However, if goods and/or services used for non-business purpose then, tax paid on such goods or services or both can not be availed as credit.

Input tax credit is also allowed on capital goods. 

However, we have few exceptions to it. As per section 16(2) of CGST Act, 2017, a registered person shall be entitled to the credit of input tax in respect of supply of goods and/or services unless,-

  • he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
  • he has received the goods and/or services.
  • tax charged in respect of such supply has been actually paid to the Government. Mode of payment is not a criteria here. Payment can be through cash, or through utilization of ITC.
  • he has furnished the return u/s 39.

If goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment.

Goods and/or services must be received by the supplier

As discussed above, one of the conditions to get input tax credit in respect of supply of goods and/or services is that you must have received it. However there can be situations where such goods and/or services might not have been physically received by you. CGST Act, 2017 has provisions for that.

As per section 16 of CGST Act, 2017, it shall be deemed that the registered person has received the goods or, as the case may be, services –

  • where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
  • where the services are provided by the supplier to any person on the direction of and on account of such registered person. In this case, the registered service recipient does not receive the service, however as such a person has directed the service provider to render services to a third party, it is to be deemed that the registered person has received the service. Therefore, ITC will be available to the registered person on whose direction the services are provided to the third person.

When recipient fails to pay to the supplier

where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.

The recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

When input tax credit can’t be availed

As per section 18(2) of CGST Act, input tax credit in respect of supply of goods and/or services can’t be taken by the recipient after expiry of 1 year from the date of tax invoices relating to such supply.

Section 16(4) of CGST Act also has restrictions on use of input tax credit. As per this section, registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both, after the filing of the return U/S 39 of CGST Act for the month of September following the end of the financial year to which such invoice or invoice relating to debit note pertains or filing of the relevant annual return, whichever is earlier.

Time limit to file return for the month of September is 20th/22nd/24th October and annual return of a financial year is to be filed by 31st December of the following financial year. Therefore, the upper limit of taking ITC is 20th/22nd/24th october of the next financial year or the date of annual return filing, whichever is earlier. However, if annual return has been filed before the month of september, then no change can be made after filing of annual return.

Please note, the time limit of availing credit is not applicable where you are denied credit for non payment of value of goods and GST to supplier. This means, in this case, above time limit restriction will not be applicable.

As per section 16(3) of CGST Act, 2017, if the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

No input tax credit shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where any demand has been confirmed on account of any fraud, willful misstatement or suppression of facts.

With effect from 09.10.2019, Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 percentage of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.

GST law also specifically disallows certain types of input tax credit while supplying goods and/or services. We have written a different article “When input tax credit shall not be allowed under GST law”, you can read it to know more.

What to do when supplies used partly for business and partly for other purpose

As per section 17, where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Where the goods and/or services are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Value of exempt supply shall include supplies on which the recipient is liable to pay tax on a reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. However, the value of exempt supply shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule.

Also read:

  1. Documents required to claim input tax credit
  2. Entitlement of Input tax credit in stock at the time of registration
  3. How to avail Input tax credit on capital goods under GST law
  4. Entitlement of ITC on exiting composition levy
  5. Entitlement of ITC on inputs in stock when exempted supply become taxable
  6. Reversal of input tax credit under special circumstances
  7. How input tax credit is utilised to pay tax liability under GST law
  8. What is the time limit to claim ITC or input tax credit in GST
  9. How to transfer credit in case of separate registration for multiple business within a state or UT
  10. Transfer of Input tax Credit in case of change in constitution of business

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.