The method of taking credit for taxes already paid by a taxpayer as an input in the production of a good or service is known as ITC or Input Tax Credit under GST. Despite the fact that ITC has been in the GST system for a long time, it still has a number of problems that taxpayers face on a daily basis. This can be taken care of by CA Services for tax.
What is an input tax credit, and how does it work?
Input credit ensures that when it comes time to pay tax on output, you will deduct the tax you’ve already paid on inputs and pay the difference. When you purchase a good or service from a licenced dealer, you must pay taxes. You collect the tax when you sell. You must balance the tax liability (tax on sales minus tax on purchase) by adjusting the taxes charged at the time of purchase with the amount of output tax (tax on sales). The utilization of input tax credit is the name of this process.
If you’re a producer, for example:
a. The output tax (FINAL PRODUCT) is Rs 450.
b. The input tax (PURCHASES) is Rs 300.
c. You can claim a Rs 300 INPUT CREDIT and only have to pay Rs 150 in taxes.
Who is qualified for ITC?
An individual who is registered for GST may only claim ITC if he meets ALL of the requirements.
a. The distributor must have a tax invoice, b. The goods/services must have been received, and c. Returns must have been filed.
d. The tax levied has been paid by the supplier to the government.
e. If items are delivered in installments, ITC can only be demanded after the last lot is delivered.
f. If depreciation on the tax part of a capital good has been claimed, no ITC will be permitted. An individual who is enrolled under the GST composition scheme is not qualified to claim ITC.
What types of ITC can be claimed?
The ITC may only be used for business purposes. ITC may not be required for products or services used solely for:
a. personal use
b. exempt supplies or
c. supplies for which ITC is not available.
The business accounts and tax details can be handled by the CA Services for business.
How do I get an ITC?
Input tax credit (ITC) amounts must be reported in Form GSTR-3B by all daily taxpayers on a monthly basis. In the GSTR-3B, a taxpayer can demand ITC on a provisional basis up to 20% of the qualified ITC registered by suppliers in the auto-generated GSTR-2A return. As a result, before filing GSTR-3B, a taxpayer should double-check the GSTR-2A number.
Until October 9, 2019, a taxpayer could demand any amount of provisional ITC. However, as of October 9, 2019, a taxpayer can say only 20% of the qualifying ITC available in the GSTR-2A as provisional ITC, according to the CBIC. This means that starting on October 9, 2019, the amount of ITC listed in the GSTR-3B will be the sum of the actual ITC in GSTR-2A and the provisional ITC, which will be 20% of the actual qualifying ITC in GSTR-2A. As a result, it’s critical to fit the transaction register or expense ledger to the GSTR-2A.
Input Tax Credit Reversal
ITC can only be used on products and services for business purposes. ITC cannot be argued if they are used for non-business (personal) purposes or to make exempt supplies. Aside from these, there are a few other instances in which ITC can be reversed.
In this post, we’ll go over how input tax credit works, as well as a few of the problems with ITC under GST.
Under the GST, you can claim an input tax credit
The tax you pay as an input when making a finished product or service is called an input tax credit under GST. You won’t have to pay the same tax on the finished product or service because you already paid it. As a result, you will be able to claim credit for certain input taxes, which you will use to pay off your outgoing tax liabilities. For example, if you spent Rs. 5000 on raw materials when making shoes and owe Rs. 10,000 in taxes on the finished product (the shoes), you can claim the deduction for the tax you already paid as input and deduct it from your tax liability.
After changing, you will only be responsible for paying Rs. 5000, as the rest has already been paid to the government by your raw material supplier.
Doing, Obtaining, and Using ITC under GST
Obtaining ITC can be difficult due to the constant introduction of new provisions and modifications under the GST regime. The functioning, availment, and use of ITC under GST are all subject to a number of rules and restrictions. Unless otherwise noted, ITC can be claimed on any products and services purchased solely for the purpose of business.
However, the government has indicated that the ITC will remain blocked in several cases and scenarios. As a result, ITC is divided into two categories: qualified and disqualified (blocked) ITC. Taxpayers will be unable to assert the blocked ITC, and if they do, they will be required to reverse the ITC into their outgoing tax liabilities, with or without interest. Now, these are very particular events, and there are no exceptions. A few examples of Blocked ITC are mentioned below.
- Purchased items for personal use
- Gym, fitness club, and beauty salon memberships, for example.
- Parties want catering.
- Insurance for motor vehicles and repairs
- Purchase of a work contract from a composition dealer
- Free samples/gifts/goods that have been destroyed, damaged, or stolen
While it will seem clear that the government has specified a few cases for which ITC would not be eligible, the issue arises when it comes to practical use.
Every case is unique, and in practice, there can be a large number of them in a single business unit. So, how can you figure out if anything is applicable?
Furthermore, the government continues to make new amendments although the laws and applicability remain ambiguous. However, the government expects consistency, because if you make a mistake, you’ll be penalized with interest and even warnings.
As a result, ITC and its enforcement are extremely difficult for companies and accountants to manage. To achieve perfect ITC compliance, a thorough understanding of all existing as well as new rules and provisions is needed. And there’s the credit usage, which is once again difficult. To learn more about how ITC is used, look at the table below.
| S. No. | Type of credit | Primary Utilization | Secondary Utilization |
| 1. | IGST | IGST | CGST, then SGST/UTGST |
| 2. | CGST | CGST | IGST (cannot be utilized for SGST/UTGST) |
| 3. | SGST/UTGST | SGST/UTGST | IGST |
As seen in the table, a certain form of GST credit may only be used to discharge a specific class of tax liability. But, for example, because CGST credits can only be used to pay CGST or IGST, what happens to the credit that remains after the tax obligation has been fully discharged? Since you can’t pay SGST with CGST credits, you’ll have to move the credit over to the next tax year. This is a confusing law that has resulted in many accounting errors.
Companies face 10 practical issues with ITC
When it comes to calculating and claiming the Input Tax Credit, there are a number of problems that companies face on a daily basis. These problems arise from the imposition of too many, but ambiguous, constraints and rules in order to improve the accuracy of the provision. However, instead of making it easier for taxpayers and accountants, the ITC makes it even more complicated. Businesses that use GSTR 2A Reconciliation Software, on the other hand, can assert up to 100% ITC. Since consistency is crucial, you’ll need to keep the ITC rules close at hand at all times. However, no matter how meticulous you are, minor errors can still occur, possibly due to the fact that everyone has a different understanding of a topic. We’ve highlighted a few of the most common problems that taxpayers face while claiming ITC under GST, but the list is endless because each case is special and has its own set of circumstances.
Claiming credit under the incorrect GST head is a very common and genuine error. However, it can result in interest charges and ITC reversal. As a result, make sure you only receive tax credits under the correct headers.
Issues with claiming and using SGST
Availing and using SGST is a difficult task that needs accuracy since the SGST varies by state. There are also limits on claiming one state’s SGST if you are enrolled in another. Meaning, if you paid Karnataka’s SGST but are registered in Maharashtra, you cannot assert and use the Karnataka credit to discharge Maharashtra’s tax liabilities. You can, however, use the Karnataka SGST Credit to offset your SGST liability in Karnataka. This is really distorted and, in some ways, goes against the GST agenda.
Wrong location of supply
If your company is based in Maharashtra, but the products were delivered to your Gurgaon warehouse, the location of supply would be Gurgaon, not Maharashtra. In the example above, you must say the SGST is based on Gurgaon, which is where the supply occurred.
Receipt of Goods
To assert ITC, you must obtain the goods in their entirety, as required by law. But how can you demonstrate that you have got the products in their entirety? Via your accounts and the documents, invoices, and e-Way Bills of your suppliers, for example.
Issues with ITC reversals
There are a number of situations in which you will need to reverse the ITC as well as the interest. Since there are so many new laws, it’s easy to mistake an ineligible ITC for one that is. However, since you claimed an ITC that you were not qualified for, this mistake could result in penalties.
ITC reversal on asset disposals and capital goods
The life of assets and capital goods is set to be at least 5 years, but if you sell or dispose of them before that time, you will have to reverse the ITC that you claimed on their purchase.
ITC on samples, stolen, damaged goods- You would have to reverse the ITC you said on inputs in the making of samples, gifts, stolen, damaged, and missing goods because you didn’t really sell them. While samples are part of a marketing strategy, this rule clearly disadvantages businesses.
Failure to pay within 180 days- If you do not make the entire payment within 180 days of the invoice date, you will have to reverse the ITC.
The time limit for claiming ITC under GST- The government has set a time limit for claiming the credits, after which your credit will expire, and you will no longer be eligible to claim them. Businesses and accountants are put under even more strain as a result of this.
Vendor Compliance- You must be certain that the tax you pay to the supplier is collected and remitted to the government. That is, the supplier must first file their GST returns and release their tax liabilities before you can demand the credit. However, the problem is that you have no influence over your supplier’s actions; you can only warn them or pursue them to be compliant, but their actions could be beyond your control.
Final thoughts
So, claiming ITC under GST is not as simple as it seems, and it necessitates precision and experience. Manual errors, on the other hand, are still present and are very common. ITC, or Input Tax Credit, is a way of taking credit for taxes already paid by a taxpayer as an input in the development of a good or service under GST. A variety of rules and restrictions apply to the operation, availability, and use of ITC under GST. According to the government, the ITC is still being blocked in a range of cases. Taxpayers won’t be able to claim the blocked ITC, because if they do, they’ll have to reverse the ILC into their incoming tax liabilities. Taxpayers and accountants face a slew of issues when it comes to calculating and receiving the Input Tax Credit. To make the clause, there are far too many vague constraints and rules in place. VAT Change for Dealers to Selling Goods Online is a much-needed update to know if you have your business in the UK.