Explained: Input tax Credit under GST (ITC)

India’s indirect taxation system has evolved from Zakat and Value Added Tax (VAT) to Goods and Services Tax (GST). In this transition many changes are implemented for the benefit of small and medium businesses and to encourage ‘Ease of Doing Business’ in India. One of the prominent positive changes is Input Tax Credit under GST. In this blog we will discuss what is Input Tax Credit, its importance and who can claim it. 

What is an Input Tax Credit?

Input Tax Credit (ITC) is a key feature of GST in India, designed to prevent the cascading effect of taxes.The main aim of this feature is to reduce the cost of running a business. 

Under this system, when a GST-registered person purchases goods or services for business purposes, they can offset their GST liability (calculated from outward supplies) can be offset against the ITC. 

What is the Importance of Input Tax Credit? 

The following are the reasons which prove the importance of ITC from a business perspective: 

• No double taxation:

It ensures that the tax is paid on the value addition at each stage of the business, not on the entire value of the deliverables. 

• Better cash flow:

It helps maintain a healthy cash flow as it allows for the offset of tax liability. 

• Cost reduction:

Businesses can decrease the selling price of their products as they claim ITC on their purchases. 

Who can Claim ITC?

To claim ITC on the inward supply, the first and foremost condition is to have GST registration. Following are the criteria that you need to adhere to claim ITC: 

1. Having tax invoice:

To claim ITC on the GST paid, one should have a valid invoice or any other document as proof of transaction mentioning the tax paid. 

2. Receipt of goods or services:

The ITC claim can be made only after the goods have been received by the registered person, irrespective of the case where the billing and shipping address are different. 

3. Tax paid:

The tax amount must be paid by the supplier for the ITC to be eligible for refund. 

4. Filing the return:

The registered person has to file the return to claim the Input Tax Credit under GST. 

5. Delivery-based eligibility:

If the goods are delivered in multiple lots throughout multiple months, then eligibility to claim ITC is the same. 

Additional Read: Who Can Claim GST Refund

Ineligible Input Tax Credit under GST

To get Input Tax Credit under GST, one needs to adhere to laid out rules and regulations. Following are the cases where Input Tax Credit is not applicable. 

• GST paid on goods and services for personal consumption by either registered or unregistered persons. 

• GST is paid on transportation, except when used for cargo transportation or training. 

• GST is paid on medical services, cosmetics, beauty treatments, food, and beverages. 

• GST charged to the membership of the clubs, health, and fitness centres cannot be claimed. 

• GST paid by a Non-Indian Resident or NRI taxable person, excluding those services or goods where IGST is payable. 

• GST paid on travel benefits offered to employees for non-business purposes.

Over To You 

This was all about the Input Tax Credit under GST. We hope that after reading this blog, you understand the importance of ITC under GST, what eligibility criteria to claim, and who can claim. If you are looking for GST return filing software with the ability to offset ITC, then you are in the right place. Munim GST Return Filing software has everything you need to stay compliant with GST and offers ITC offsetting with 100% accuracy. Sign up now and get a 60-day free trial with no terms and conditions attached. 

FAQs on ITC Under GST

1. What is the Input Tax Credit in GST, for example? 

Input TaX Credit under GST enables businesses to get back the tax paid on inward supplies, by doing so they reduce their tax liability. Still wondering how it works? Let’s understand with an example. Suppose a business pays Rs. 10,000 as a total invoice value and out of which Rs. 2800 is accounted for GST. This tax amount i.e. Rs. 2800 is claimable under ITC. 

2. How do you check input tax credit in the GST Portal? ​

Following are the steps to check the Input Tax Credit (ITC) in GST Portal: 

Step #1: Go to the official GST Portal and log in with your valid credentials. 

Step #2: Go to ‘Service ledger’ > ‘Electronic Credit Ledger’ 

Step #3: Check the details of the Input Tax under GST in the ledger. If the amount is either zero or negative, you are not eligible to claim it. 

Step #4: Select the dates to view the transaction. 

Step #5: Check the entries in electronic ledger. 

Step #6: You can save the transaction in PDF or Excel format. Choose the preferred option. 

Step #7: Click on the description to view whether the credit amount is blocked or unblocked. The authority to change the status is reserved for tax officers. 

Step #8: Close the window by clicking on ‘Ok’. 

3. What are the prior conditions for claiming an Input Tax Credit? ​

The prior condition to get Input Tax Credit is to have a valid GST registration and should possess either a tax invoice or debit note issued by the supplier. 

4. What percentage of input tax credits business can claim​? 

Generally, 100% ITC can be claimed if purchase is for business purposes. However, if the purchase is done for mixed purpose i.e business as well as personal use, you are eligible to get ITC based on usage ratio. 

5. Can hotels claim input tax credits​? 

Yes! Hotels can claim ITC under GST, provided that they are a GST-registered entity and are levying 12% or above as GST, based on their category laid out in CGST Act.