Input Tax Credit (ITC) under the GST Act is a mechanism that allows businesses to claim credit for the taxes paid on inputs (goods or services) used in the production of taxable goods and services. The primary objective of ITC is to avoid the cascading effect of taxes, which means tax on tax, by allowing businesses to offset the tax paid on purchases against their tax liability on sales. This ensures that taxes are levied only on the value added at each stage of the supply chain. ITC reduces the overall tax burden on businesses, enhances cash flow, and promotes compliance with the GST framework by ensuring transparency and minimizing tax evasion. Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”) is one of the key features of Goods and Services Tax.

GST comprises of the following levies:

• Central Goods and Services Tax (CGST) [also known as Central Tax] on intra-State or intra-Union territory (without legislature) supply of goods or services or both
• State Goods and Services Tax (SGST) [also known as State Tax] on intra-State supply of goods or services or both
• Union Territory Goods and Services Tax (UTGST) [also known as Union territory Tax] on intra-Union territory (without legislature) supply of goods or services or both
• Integrated Goods and Services Tax (IGST) [also known as Integrated Tax] on inter-State supply of goods or services or both. IGST is also levied on import of goods or services, as the same is regarded as inter-State supply

Input Tax Credit (ITC)

Before understanding the concept of Input Tax Credit, let us study Key Terminologies of GST Law in connection with Input Tax Credit.

Input:

Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Input Service:

This term denotes any service used or intended to be used by a supplier in the course of furtherance of business.

Input Tax:

Input tax in relation to a registered person, means the Central Tax, State Tax, Integrated Tax or Union territory tax charged on any supply of goods or services or both made to him & includes

• the integrated goods and services tax charged on import of goods ;
• the tax payable under the provisions of sub sections (3) and (4) of section 9;
• the tax payable under the provisions of sub sections (3) and (4) of section 5 of the integrated goods and services tax;
• the tax payable under the provisions of sub sections (3) and (4) of section 9 of the respective State goods and services Tax Act ;or
• the tax payable under the provisions of sub sections (3) and (4) of section 7of the Union Territory goods and services Tax Act ,

but does not include the tax paid under the composition levy.

Electronic Credit Ledger:

This ledger will serve as an electronic wallet. Where the Taxpayer needs to make any payment such as tax, interest, penalty etc. and he does not have enough credit in his E-Credit Ledger, he will have to simply add money to the wallet and the money will be utilized to make the payment. This Ledger will basically reflect all the deposits made in cash using various modes.

Electronic Cash Ledger:

The input tax credit that is self-assessed in the monthly returns will be reflected here under three categories i.e. IGST, CGST & SGST. The Tax Payer will be able to utilize the balance shown in this account only for payment of Tax as per the credit utilization rules and no other amount such as Interest, Penalty etc.

Pre-Requisites to claim Input Tax Credit (ITC):

Any registered person can avail credit of tax paid on the inward supply of goods or services or both which is used or intended to be used in the course or furtherance of business. The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:

• He is a registered taxable person.
• The goods and services received is used for business purposes by him.
• He is in possession of tax invoice or any other specified tax paying document
• He has received the goods or services. “Bill to ship to” scenarios also included
• Tax is actually paid by the supplier
• He has furnished the return
• If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received
• He should pay the supplier the value of the goods or services along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 37(1) & (2) of CGST Rules, 2017]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed

Documents Required for Claiming ITC:

Documents on the basis of which credit can be availed are:

• Tax Invoice issued by a supplier of goods or services or both
• Tax Invoice issued by recipient along with proof of payment of tax
• A debit note issued by supplier
• Bill of entry or similar document prescribed under the Customs Act
• Revised invoice
• Document issued by Input Service Distributor

The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request

Notes:

• One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
• If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
• The Input Tax should be paid through Electronic Credit/Cash ledger.
• Person claiming the ITC has to furnish the returns.
• Full Credit on capital goods will be allowed in the year of purchase itself.
• No ITC can be availed on any invoice or debit note beyond due date of furnishing of return for the month of September following the end of financial year to which such invoice or debit note pertaining to such invoice pertains or date of filing of annual return, whichever is earlier.
• The Input Service Distributor (ISD) may distribute the credit available for distribution in the same month in which it is availed. The credit of CGST, SGST, UTGST and IGST shall be distributed as per the provisions of Rule 39(1) (d) of CGST Rules, 2017. ISD shall issue invoice in accordance with the provisions made under Rule 54(1) of CGST Rules, 2017.

Working of Input Tax under GST

Suppose Avinash is a seller. He sells goods to Balram. The buyer Balram is now eligible to claim the purchase credit using his purchase invoices. The input tax works as follows:

• Avinash uploads all his tax invoices details as issued in GSTR-1.
• The details uploaded by Avinash is automatically populated or reflected in GSTR-2A. This same data will get reflected when Balram files the GSTR-2 returns which are nothing but the details of his purchase.
• The details of the sale are then accepted and acknowledged for by Balram, and subsequently, the purchase tax is credited to Balram’s ‘Electronic Credit Ledger ‘ He can use this to adjust it later for future output tax liability and receive a refund.

Matching Mechanism for ITC Monitoring

A matching mechanism has been developed to make sure there is no duplication in claiming ITC. It ensures that inward supplies returns filed by receiver matches outward supplies returns filed by supplier. Matching mechanism also helps in matching ITC claims with customs paid where goods are imported by registered taxable person. Any discrepancy which arises post verification is intimated to both parties so that they can make necessary corrections within the prescribed time frame.

The Protocol to Avail Credit:

The protocol to avail and utilise the credit of these taxes is as follows: Credit of CGST cannot be used for payment of SGST/UTGST and credit of SGST/UTGST cannot be utilised for payment of CGST. It may be mentioned that only after the credit of IGST has been fully utilised the credit of CGST or SGST/UTGST, lying in balance in Electronic Credit Ledger, can be utilized in any order.

Input Tax Credit	Tax Credit Utilization Preference
IGST	IGST	CGST	SGST	X
CGST	CGST	IGST	X	X
SGST	SGST	IGST	X	X
Cess	X	X	X	Cess

Claiming Input Tax Credit against Inputs Sent for Job Work

A registered taxable person can also claim ITC on inputs sent to gob-workers if the following conditions are satisfied:

• You should receive such input back within 1 year.
• If the inputs involved are capital goods, then he should get such inputs back within 3 years.
• If he fails to receive inputs within the above mentioned time period, then he will have to pay an amount equal to ITC claimed along with interest.
• However, he is still allowed to reclaim ITC if inputs or capital goods are received back from the place of business.

Input Tax Credit on Supply of Capital Goods

• A registered taxable person is liable to pay tax on such a supply of capital goods on which ITC has already been claimed.
• This amount should be equal to ITC claimed after reducing it by prescribed percentage points or the tax applicable on the transaction value of such capital goods, whichever is higher.

Where Goods and/or Services are Used Partly for Business Purposes and Partly for other Purposes:

Input Tax Credit is eligible on the goods or services or both, which are used or intended to be used in the course of furtherance of business by the registered person. However, some times, the registered person may utilize the goods or services or both, partly for the purposes of business and partly for other purposes or partly for taxable supplies and partly for exempt/ non-taxable supplies. In such cases, the input tax credit cannot be allowed in full and has to be restricted to so much of the input tax that is attributable to the purposes of business/taxable supplies by the registered person. The quantum of the available ITC in such cases has to be worked out as prescribed in the rules.

Provisions Specifically Applicable for Construction Service:

 w.e.f. 01.04.2019, in case of supply of construction services, the input tax shall be calculated finally, for each ongoing project or project which commences on or after 1st April, 2019, which did not undergo or did not require transition of input tax credit consequent to change of rates of tax on 1st April, 2019 in accordance with notification No. 11/2017- Central Tax (Rate), dated the 28th June, 2017, as amended, for the entire period from the commencement of the project or 1st July, 2017, whichever is later, to the completion or first occupation of the project, whichever is earlier, before the due date for furnishing of the return for the month of September following the end of financial year in which the completion certificate is issued or first occupation takes place of the project. This has to be calculated in the manner specifically prescribed in the rule42 and 43 of CGST Rules, 2017 (for construction services).

ITC is Not Available to be Claimed in the Following Cases, u/s17 (5):

ITC is not available in some cases as mentioned in section 17(5) of CGST Act, 2017. Some of them are as follows:

• Motor vehicles and other conveyances, having seating capacity of more than 13 persons (including driver), except under specified circumstances.
• Goods and/or services provided in relation to:
  • food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;
  • membership of a club, health and fitness centre;
  • Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;
  • travel benefits extended to employees on vacation such as leave or home travel concession;
• Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;
• Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;
• Goods and/or services on which tax has been paid under composition scheme;
• Goods and/or services used for private or personal consumption, to the extent they are so consumed; g. Goods lost, stolen, destroyed, written off, gifted, or free samples;
• Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.

Special circumstances under which ITC is available:

• A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax.
• A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date of registration.
• A person who has taken voluntary registration under section 23(3) of the CGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date of registration.
• A person switching over to normal scheme from composition scheme under section10 of the CGST Act, 2017 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer.
• Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply subject to reductions for the earlier usage as prescribed in the rules.
• ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier. f. In case of change of constitution of a registered person on account of sale, merger, demerger etc., the unutilised ITC shall be allowed to be transferred to the transferee.
• A person switching over from composition scheme under section 10 of the CGST Act, 2017 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid.
• In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof shall have to be paid). However, in case the tax on transaction value of the supply is more than the ITC payable, the same would have to be paid.
• Input tax credit is allowed on inputs and Capital goods sent to a job worker for job work. Input tax credit can be taken on inputs and capital goods even if they are directly sent to a job worker for job work without being first brought to his place of business. However, the same are required to be brought back or cleared on payment of tax, within the time-limit specified in section 143 of the CGST Act, 2017.

Reversal of Input Tax Credit

• Proportionate amount of ITC will be reversed if goods or services are used for business or non-business purposes.
• Where the recipient fails to pay the amount of value of supply along with the tax payable thereon within a period of 180 days from the date of invoice by the supplier, an amount equal to ITC availed by the recipient ;
• Reversal of ITC if goods or services become wholly exempt or GST registration cancelled;
• Reversal of ITC if taxable person switches to composition Scheme.

However, the value of supplies in respect of following shall be deemed to have been paid and ITC shall not be reversed in such cases:

• Value of supplies made without consideration as specified in Schedule-I
• Value of supplies on account of any amount added in accordance with the provisions of section 15(2) (b), i.e. any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both (Notification No. 26/2018-Central Tax, dated 13.06.2018)
• Value representing discount for which financial credit notes have been issued by the supplier

Conclusion:

In conclusion, Input Tax Credit (ITC) under the Indian GST Act is a crucial feature that significantly enhances the efficiency and transparency of the tax system. By allowing businesses to claim credit for taxes paid on inputs, ITC eliminates the cascading effect of taxes, reducing the overall tax burden and ensuring that taxes are levied only on the value added at each stage of the supply chain. This mechanism encourages compliance, promotes business growth, and supports the smooth functioning of the GST ecosystem.

The eligibility criteria and conditions set by the GST Act, including the need for valid invoices and tax payment by the supplier, ensure that ITC is used properly and in a transparent manner. However, certain goods and services are excluded from ITC, and businesses must adhere to these provisions to avoid tax-related issues. The system also requires proper matching of returns, ensuring that ITC claims align with the supplier’s tax declarations. The introduction of ITC has led to improved cash flow for businesses, as they can offset their tax liability with the credit received on inputs.

In essence, ITC plays a pivotal role in fostering a fair and efficient tax system in India. It helps in reducing the cost of production, making businesses more competitive, and contributing to the overall economic growth of the country. Thus, understanding and adhering to the rules surrounding ITC is essential for businesses operating under the GST regime.