INPUT TAX CREDITS(ITC)

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Context: 

The Supreme Court declared that real estate companies can claim Input Tax Credits (ITC) under the Goods and Services Tax (GST) regime, on costs of construction for commercial structures intended for renting or leasing purposes.

‘Input Tax Credit’ or ‘ITC’ 

Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. 

In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.

Essentially, businesses can offset the GST they've paid on purchases against the GST they collect on sales. 

For example, if you are a manufacturer,

• You've paid Rs. 10,000 in input tax on product purchases
• You've collected Rs. 25,000 in output tax on product sales
• Consequently, your net tax payable amounts to Rs. 15,000 (calculated as Output Tax Collected minus Input Tax Credit).

Who Can Make Input Tax Credit Claims?

Input Tax Credit for Capital Goods

A GST-registered entity can claim input tax credit for capital goods purchased from a registered supplier(s) provided it is for business purposes. Examples of such capital goods include (but is not limited to) key business inputs like machinery, equipment, and office furniture used for your business operations.

Input Tax Credit for Raw Materials

GST-registered entities are also eligible to claim ITC for raw materials used in any production processes or services which it might provide. 

This includes items such as chemicals, metals, or wood, as well as any other components used to manufacture your products or render services. For example, if you purchase raw materials with a 5% GST rate, you then can claim the GST so paid as input tax credit.

Input Tax Credit for Input Services

GST-registered entities can also claim ITC on GST paid for availing services that are utilized for business purposes. 

Examples of such services that are eligible for input tax credit include GST paid for transport and logistics services, telecommunication services as well as banking and insurance services. 

Who can not claim the Input Tax Credit

There are some situations where even after payment of GST, input tax credit can be claimed. A few expenses where ITC is not allowed include:

• Travel expenses of employee during period of leave
• Valid ITC entry must be visible in GSTR-2B submitted of buyer/recipient
• Goods and services utilized for construction of immovable property for personal or business use
• Any goods/services exclusively for personal use
• Standalone restaurants charging 5% GST on food but are not allowed to claim ITC on inputs
• Expenses related to CSR (corporate social responsibility) initiatives
• Purchase of goods and services for business purposes made by an entity registered under the GST composition scheme

Type of taxes under GST for which ITC can be claimed:

All taxes under GST can be claimed under the ITC.

• Under the GST regime, all existing taxes such as Value added Tax(VAT), Central sales Tax(CST), Excise Duty, Service Tax, and Entertainment Tax are replaced by GST. There are three main types of taxes under GST:
• State GST (SGST): This tax is levied by the state government on transactions within the state's boundaries.
• Central GST (CGST): CGST is imposed by the central government on intra-state transactions, i.e., transactions within the same state.
• Integrated GST (IGST): IGST is charged by the central government on inter-state transactions, i.e., transactions between different states or Union territories.

Reversal of Input Tax Credit

1. Non-payment of invoices within 180 days: ITC will be reversed for invoices that remain unpaid beyond 180 days from the date of issue.
2. Credit note issued to Input Service Distributor (ISD) by the seller: If a credit note is issued by the seller to the Input Service Distributor, the ITC will be reversed.
3. Inputs used partly for business and partly for exempted supplies or personal use: In cases where inputs are used for both business and non-business (personal) purposes, the portion of ITC used for personal purposes must be reversed proportionately.
4. Capital goods used partly for business and partly for exempted supplies or personal use: Similar to the above situation, if capital goods are used for both business and non-business (personal) purposes, the ITC must be reversed proportionately.

Rule 86A in GST rules introduced in 2019

Rule 86A of the CGST Rules was introduced in 2019.

It empowers GST Officers to restrict the ITC access to a taxpayer's electronic credit ledger if the Officer has “reasons to believe” that the ITC was obtained unlawfully.

This Rule was added to prevent the practice of false invoicing without actual supply of goods.

The ITC lying in electronic credit ledger may be blocked only by the Commissioner or an Officer authorized by the Commissioner, not below the rank of an Assistant Commissioner. 

The Commissioner is required to provide material evidence available or gathered on record which prima facie ascertains that the ITC was availed fraudulently or is ineligible.

Latest updates in ITC 

Union Budget 2021 amended CGST Rule 36(4) to remove 5% additional ITC over and above ITC appearing in GSTR-2B. 

GSTR-2B includes details of all invoices, credit/debit notes, etc.

Budget 2022 made a provision that businesses can avail ITC only if it is reported by the supplier in IFF and it appears in their GSTR-2B.

Invoice Furnishing Facility (IFF) is the option that is provided to the assessee to furnish the information of outward supplies in 1st two months for the quarter (M1 and M2). 

Important articles for reference:

GST

Composition scheme

Sources:

https://epaper.thehindu.com/ccidist-ws/th/th_international/issues/102036/OPS/GBRDDNGKG.1.png?cropFromPage=true

https://www.maxlifeinsurance.com/blog/tax-savings/what-is-gst-input-tax-credit-itc#

PRACTICE QUESTION Q.Consider the following statements about the Input Tax Credits(ITC):  ITC is a mechanism to avoid the cascading of taxes.  All taxes under GST can be claimed under the ITC.  ITC will be reversed for invoices that remain unpaid beyond 90 days from the date of issue. How many of the above statements is/are correct? A.Only one B.Only two C. All Three D.None Answer: B Explanation: Statement 1 is correct:  It means the Goods and Services Tax (GST) paid by a taxable person on any purchase of goods and/or services that are used or will be used for business.  Essentially, businesses can offset the GST they've paid on purchases against the GST they collect on sales. Since GST is an integrated tax system, every business transaction is interconnected, ensuring that the credit flows smoothly across the entire supply chain. ITC is a mechanism to avoid the cascading of taxes. Cascading of taxes, in simple language, is 'tax on tax'. Statement 2 is correct:  All taxes under GST can be claimed under the ITC. Statement 3 is incorrect:   ITC will be reversed for invoices that remain unpaid beyond 180 days from the date of issue.