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GST - Input Tax Credit

GST - Input Tax Credit

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From 1st July, 2017 GST is applied on all the goods and services in all over the India. There are five different rates of GST - 0%, 5%, 12%, 18% and 28% - which are applied on goods and services. Previously different states applies different rates of tax on goods and services for manufacturing and other business. In GST all the taxes are combined in one tax system. Input tax credit is one of the important concept in GST and it is also the most confusing topic of GST. In this blog article we will understand input tax credit mechanism in GST.

What is Input Tax Credit?

There are two types of transactions happen in any business, inward supply and outward supply. Business procure raw materials, semi-finished or finished goods which is inward supply and after making the product they sale it, which is outward supply. In GST inward supplies are termed as input and outward supplies are termed as output. Business needs to pay tax for the inward supply and also they collect tax while outward supply. But after GST, businesses can set off the amount they paid at the time of inward supply while paying sales tax collected from outward supply to Government. This process of setting off taxes is called input tax credit. In general sense, the adjustment of output tax by the input tax is input tax credit.

Input tax credit mechanism bring lots of benefits in Indian market. One of the most important benefit is it removes the cascading effect of tax. What is cascading effect of tax? cascading effect of tax is ‘tax on tax’. In the following example cascading effect of tax and how GST removes it will be cleared.

Example:
In GST resume: Suppose a business man buys some cloth for RS 1000 having the GST of RS 100 as the rate is 10%. Now after making the shirt the business man selling it at RS 2000 + tax. He is adding the value of RS 1000. Consider the GST on shirt is 12%. Thus the final price of shirt will be RS 2000 + RS 240 = RS 2240. As he already paid his input tax of RS 100 so he can take a credit of RS 100 and needs to pay only RS 140 to Government as GST.

In previous regime: In previous regime as he paid a tax of RS 100, so when selling the shirt the price he will count is RS 2000 + RS 100 which is equals of RS 2100 (as he adds a value of RS 1000). Now 12% of RS 2100 is RS 252 thus final price of shirt will be RS 2100 + RS 252 = RS 2352. Which will increase the price of the shirt by RS 112.

Types of GST: In GST there are three types of taxes, CGST, SGST and IGST.

CGST will be applied for the intra-state transactions by Central Government.

SGST will be applied for the intra-state transactions by State Government.

IGST will be applied for the inter-state transactions by Central Government.

Adjustment of the credits of these taxes are allowed with the following rules.

  • CGST credit can be used to adjust the CGST liability first, if there is a credit left over then it will be used to adjust IGST liability.
  • SGST credit can be used to adjust the SGST liability first, if there is a credit left over then it will be used to adjust IGST liability.
  • IGST credit can be used to adjust the IGST liability first, if there is a credit left over then it will be first used to adjust CGST liability and then SGST liability.

Suppose M K Aluminium Ltd. has CGST credit of RS 200, CGST liability of RS 300, SGST credit of RS 250, SGST liability of RS 350, IGST credit of RS 500 and IGST liability of RS 200.

  • M K Aluminium will set off CGST liability of RS 200 by CGST credit of RS 200 remaining CGST liability is RS 100.
  • The company will also set off SGST liability of RS 250 by SGST credit of RS 250 remaining SGST liability is RS 100.
  • And finally M K Aluminium will use IGST credit of RS 500 to set off IGST liability of RS 200, then remaining CGST liability of RS 100 and at the end SGST liability of RS 100 with remaining IGST credit is RS 100 which will be carry forward.

Reconciliation of ITC

Suppose HH International has bought 5 tons of Aluminium from KK Groups. They both are registered under GST. They will reconcile and the receiver will take the input tax credit by following steps -

  • KK Groups will file GSTR-1 in GST portal.
  • The information will be automatically be filled up in GSTR-2A of HH International.
  • HH International will check the detail and do necessary modification and file GSTR-2 by pulling information from GSTR-2A. The correct input tax credit will be credited to the electronic ledger of HH International.
  • KK Groups will see the modification make by HH International and accept it in GSTR-1A.
  • Finally when KK Groups will file GSTR-3 HH International will be able to avail the input tax credit.

Pre-requisite to avail ITC
  1. The person must be registered under GST.
  2. He should have tax invoice.
  3. The receiver should receive the goods or services.
  4. The tax is already paid by supplier.
  5. He has furnished the return files.
  6. In case of installment supply he is allowed to take ITC after final installment.
  7. He should pay the supplier within 180 days from the date of invoice.

Document on which ITC is allowed
  1. Invoice issued by a supplier.
  2. Invoice by receiver as the proof of tax paid.
  3. A debit note issued by a supplier.
  4. Bill of entry prescribed by Customs Department.
  5. Revised invoice by supplier.
  6. Invoice issued by Input Service Distributor.

ITC is allows only on business purpose goods or services
  1. No ITC can be availed if the goods or service or both are used for non-business purpose.
  2. If partial goods are used for business and partial are for non-business purpose then ITC is allowed only on business portion.
  3. When goods or services are partially used for exempted goods or services making and partially used for non-exempted goods or services making, then ITC is allowed on non-exempted goods or services portion.
  4. ITC is now allowed on exempted supply.

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