Maximize Your Savings with the Insight of ITC under GST!

What is Input Tax Credit?
What are Different Types of GST
What is the maximum Time limit to claim ITC on Purchases or Debit Notes
What is Ineligible ITC u/s 17(5)
What are the consequences of violating ITC provisions under Section 17(5) of the CGST Act?
Where can one find the list of ITC that is not eligible under Section 17(5) of the CGST Act?

1. What is Input Tax Credit?

Input credit refers to the ability to reduce the amount of tax you owe on your final product by subtracting the tax you have already paid on your inputs. For example, if you are a manufacturer, and the tax owed on your final product is Rs. 800, but you have already paid Rs. 600 in taxes on your purchases, you can claim INPUT CREDIT of Rs. 600 and only need to pay an additional Rs. 200 in taxes.

Under the GST Act, you are eligible for the Input Credit Mechanism if you are registered as a manufacturer, supplier, agent, e-commerce operator, aggregator, or any other related person. This means that you can claim INPUT CREDIT for the tax paid on your PURCHASES.

2. What are the different Types of GST ?

GST is structured based on the type of transaction. The transaction type could be Intra State Transaction or Inter State Transaction

Intra State Transaction- When a transaction of sale and purchase happens within the same state. It is called Intra State Transaction. In such cases, CGST and SGST is levied.

For instance, garments are sold be Monte Carlo registered in Punjab to Best Woolens also registered in Punjab. It will be an Intra state transaction. CGST and SGST will be levied on the transaction . CGST- tax component will go to the Central government and SGST-tax component will go to the State government.

Inter State Transaction- When a transaction of sale and purchase happens within different states. It is called Inter State Transaction. In such cases, IGST is levied.

For instance if a transaction takes place between two states, such as a supplier in Gujarat selling metal strips to a customer in Punjab. IGST will be collected and it will be shared between the Central Government and the Punjab Government

There are three forms of Tax under GST:

State Goods and Services Tax (SGST),

Central Goods and Services Tax (CGST),

and Integrated Goods and Services Tax (IGST).

SGST: It is called the State GST. The state government levies SGST on intra-state transactions of goods and services, and the revenue collected is kept by the state government. SGST replaces earlier taxes such as purchase tax, luxury tax, VAT, Octroi, etc.

Union territories such as Chandigarh, Daman and Diu, and Andaman and Nicobar Islands replace SGST with Union Territory Goods and Services Tax (UGST).

CGST: It is called Central GST. The Central government levies CGST on intra-state transactions of goods and services. It is collected alongside SGST or UGST, and the revenue is split equally between the Central and state governments.

IGST: IGST is levied on inter-state transactions of goods and services, as well as imports and exports. The revenue generated from IGST is split between the state and Central governments.

To claim input credit under GST, the following steps should be taken:

Obtain a tax invoice or debit note from a registered dealer for the purchase.
Ensure that you have received the goods or services being purchased.
Make sure that the tax paid on your purchases has been deposited or paid to the government by the supplier.
Ensure that the supplier has filed their GST returns and uploaded the invoice in their GSTR-1, which should appear in your GSTR-2B.

Note that to claim input credit, your suppliers must also be GST compliant.

It is important to note that unclaimed input credit can be carried forward or claimed as a refund if the tax paid on purchases is higher than the tax on sales. However, no interest will be paid by the government on the input tax balance.

Input tax credit can be claimed for both goods and services, except those on the exempt or negative list, and on capital goods. No input tax credit will be allowed for goods or services used for personal purposes.

3. What is the maximum Time limit to claim ITC on Purchases or Debit Notes?

A registered individual will not be eligible to claim input tax credit on invoices or debit notes for goods or services after the 30th day of November after the end of the financial year to which the invoice or debit note relates, or when the annual return is submitted, whichever comes first.

For example for the FY 2022-23

Purchase Invoice Date 10.02.23- Taxable Value Rs 1,00,000 and IGST – Rs 18,000

Due date for submission of Annual Return 31.12.23

Last date by which the credit can be availed in 3B - October’23 3B which should be filed latest by 30.11.23

To conclude a registered dealer gets time of 8 months to claim ITC on Purchase invoices or Debit notes after the end of the relevant financial year to which such invoice or debit note relates

4. What is Ineligible ITC?

Section 17(5) of the CGST Act outlines the list of purchases on which GST is paid but cannot be claimed as Input Tax Credit (ITC). This section is referred to as the blocked credits or ineligible ITC. The latest budget update has added another item under ineligible ITC, expenditure on Corporate Social Responsibility initiatives.

The provision has 11 clauses, each covering different expenses on which ITC cannot be claimed. This provision overrides the provisions of Section 16(1) and 18(1), which deal with the availability of ITC in general and special cases respectively.

ITC paid on Purchase of Vehicles cannot be claimed

Clause (a), (aa), and (ab) of the provision deal with transportation expenses such as the purchase of vehicles, ships, and aircraft, and their related input services like insurance and maintenance.

Exceptions

Such ITC claims are only allowed if the buyer is involved in passenger transportation, resale of vessels or aircraft, driving schools, or insurance companies selling general insurance policies.

Food, Catering, Vehicle Renting, Club, & Travel

ITC paid on purchase of below mentioned services is ineligible

Outdoor catering
Restaurant expenses
Health and Beauty Treatments
Life Insurance and Health Insurance
Gym membership
Travel Benefits given to employees

Exceptions- If the registered dealer is in the business of supplying the above services,ITC can be availed on such purchases.

In case any of the above benefits are provided by employees to employer- ITC on such purchases can be availed if the provision of such services or benefits to employees by the employer is mandated under any law.

Clauses (c) & (d) – Building Construction

ITC (Input Tax Credit) cannot be claimed by a GST registered individual for GST paid on building construction or job work expenses, regardless of whether the building is intended for commercial or residential use. This also applies to any GST paid on construction materials. ITC is not available for expenses incurred on the renovation or repair of buildings that are capitalized in accounts.

Exception-ITC will be permitted for construction companies, builders, and promoters involved in the resale of constructed buildings. ITC remains available for the purchase or construction of plants or machinery.

Clauses (e) & (f) – Composition & Non-resident

Section 10 and 17(5) of the CGST Act specify the conditions for a composition taxpayer's eligibility to claim Input Tax Credit (ITC) on GST paid. A composition taxpayer, who pays tax on their quarterly turnover, is not entitled to claim ITC on the GST paid on their purchases.

On the other hand, a non-resident taxable person, who pays tax in advance, is eligible to claim ITC only on the IGST paid on the import of goods and not on any other domestic purchases.

Clause (g) refers to Personal Use.

ITC is not allowed on items that are bought but not used for business purposes. If a portion of goods or services purchased is utilized both for personal and business use, ITC will only be granted in proportion to the business usage, as calculated using the formula of shared credits.

Clause (h) - Free Samples and Losses

Input tax credit is not allowed for goods that are lost, stolen, damaged, written off, given away as free samples or gifts. In some cases, the input tax credit may have been claimed at the time of purchase, but it may later have to be reversed in GSTR-3B if any of the aforementioned scenarios occur."

Clause (i) – Fraudulent ITC Claims

ITC cannot be claimed for tax payments that were not made, underpaid, or claimed fraudulently. This includes when a refund was claimed for an excessive amount of tax, ITC was claimed or utilized in an illegal manner through fraudulent activities, intentional misrepresentation, suppression of facts, confiscation of goods, or seizure."

What are the consequences of violating ITC provisions under Section 17(5) of the CGST Act?

If the provisions of Section 17(5) of the CGST Act are not adhered to, the recipient or purchaser must retract/reverse any ITC claimed inappropriately.

Additionally, they will be subject to a penal interest rate of 24% from the time the ITC was claimed until it is reversed.

5. Where can one find the list of ITC that is not eligible under Section 17(5) of the CGST Act?

The "Auto-drafted ITC Statement" or GSTR-2B can be used by taxpayers to view a list of their purchases made during a specific tax period that are not eligible for ITC under Section 17(5) of the CGST Act.

GSTR-2B provides information about both eligible and ineligible ITC. To access it, log in to the GST portal and go to the return dashboard. Choose the appropriate month and year, and follow the steps outlined in the GSTR-2B access guide for further instructions. You can then view and download the details contained in GSTR-2B.

6.How the reversal of Ineligible ITC to be reported in 3B?

The ineligible ITC if availed previously has to be reversed in 3B. The reversal should be mentioned in Table 4(B) Point 1 of GSTR 3B.

To conclude, claiming ITC is a huge relief to businesses. Correct knowledge of knowing what can be claimed and what cannot be claimed can help businessman in managing cash flows and making informed decisions.