Input tax credit (ITC) means claiming credit for the GST paid on the purchase of goods and services that are used for the advancement of business. The input tax credit mechanism is the backbone of the GST and is one of the main reasons for the introduction of the GST. Businesses can reduce their tax liability by claiming a credit for the GST paid on purchases.
As GST is a single tax levied across India from manufacture of goods/services until it reaches the end customer, the chain does not break and everyone can benefit from it and there is a continuous credit flow.
What are the conditions for benefiting from the ITC?
- Tax documents such as tax invoice, debit note, etc.
- The good/service must have been received/deemed to have been received by the taxable person.
- Tax charged on invoice and should have been paid to government credit.
- The statement should have been provided by the taxpayer.
- Credit for goods against an invoice received in batches/installments can only be used on the last batch in installment.
- The deadlines for the allocation of a credit note on a given invoice are prescribed at the end of one year from the date of issue.
At each stage of the supply chain, the buyer gets a credit for the input tax paid, and he can use it to offset the GST that must be paid to the Central and State governments.
How does ITC work?
Suppose there is a seller A and he has sold his goods to B. Now B who is a buyer will be able to claim the input tax credit on purchases based on the invoices. So, accordingly, A will upload the details of all tax invoices issued in GSTR 1. All details in accordance with sales to B will automatically populate in GSTR 2A, and the same data will be taken when B files GSTR 2 (i.e. i.e. details of incoming supply). B will then accept the details that the purchase has been made and declared by the seller accurately and thereafter the tax on the purchases will be credited to B’s “Electronic Credit Book” and he can adjust it against to the future exit tax obligation and obtain the refund.
Is there a deadline for requesting an ITC?
ITC can only be claimed for tax invoices and debit notes that are less than one year old.
What are the challenges with ITC?
One of the main issues with the GST is the process of matching and reconciling the ITCs claimed in the GSTR-3B with the data reflected in the automatically generated GSTR-2A. While on the one hand, the GST Act encourages a continuous flow of ITCs, on the other hand, the government/department issues notices for ITC mismatches to taxpayers.
GSTR-3B is the self-reported tax summary that the taxpayer must file each month, providing the summary of tax paid on outgoing supplies and ITC claimed on incoming supplies.
GSTR-2A is a purchase-related dynamic tax return that is automatically generated by the GSTN portal for each recipient. When a seller files their GSTR-1, the information is automatically populated into the recipient’s GSTR-2A. It takes information about the goods and/or services that have been purchased in a given month from the seller’s GSTR-1.
What are the hassles faced by the industry?
The main issues with ITC that industries face are supplier credit issues that everything should reflect in the credit register. If it is not reconciled, the ITC is not given, which leads to the blocking of working capital. Even for a small clerical error or mismatch, the credit is blocked. The errors are not only related to the rate or the amount, but also to the product numbers.
For example, the tariff is different for a normal glass product and may be mentioned under the ABC number, but the processed glass or the glass used on the device is mentioned under the XYZ product list, which creates a big inconsistency in the system and transactions are suspended.
The automotive industry is one of the hardest hit, as it records 20 crores of transactions per year between receiver and supplier, worth 4,000 crores. If there is a dispute, it takes 6-8 months to resolve the issues.