Input Tax Credit

What is Input Tax Credit?

Input Tax Credit [Sec 16, 18], also popularly known as ITC is a mechanism under GST to avoid cascading of taxes. Input tax is the tax paid by a registered person on his purchases which are in furtherance to his business. This can be the GST on paid towards input goods, capital goods to the extent of the value of capitalization in the books of accounts and even services consumed as inputs. Such taxes which are paid by a registered person can be availed as credit, meaning it can be used to set off the amount of GST payable on outward supplies. In short, the output tax liability is reduced against set off with input tax, making the taxable person to pay only the balance amount. 

How does ITC work in reality?

At each stage of the supply chain, the buyer avails credit for the input tax paid (tax on purchases), which can be used to offset the GST liability payable to the Centre and State Government. Let's understand this with an example.

Sulekha Enterprises is an organization registered in Mumbai which supplies customized metal key chains. They purchased metal, rubber and plastic for Rs. 20,000/- from Alpha Ltd paying GST @ 18%. Hence, the input tax here will be (20,000 X 18%) = Rs. 3,600/-.

Sulekha sold all the metal key chains to Zubair Ltd,a registered key chain dealer in Mumbai for Rs. 35,000/-. Here, the GST collection from Zubair Ltd will be (35,000 X 18%) = Rs. 6,300/-.

Therefore, the net amount of GST payable by Sulekha Ltd. to the Government will be Rs. 6,300 - Rs. 3,600 = Rs. 2,700/-.

When can ITC be availed? [Section 16(2)]

• The buyer must have a valid tax invoice / self-invoice under RCM / debit note / bill of entry (imports) / Input Service Distributor Invoice issued by a registered supplier. Note: The person supplying goods should be registered so as to obtain a tax invoice on purchases to claim ITC. [16(2)(a)]

• The buyer should have received goods or services. ITC cannot be claimed on advance payments. [16(2)(b)]

• The amount of GST collected on the transaction should have been paid by the supplier to the Government specifying GST details of the buyer. [16(2)(c)]

• The supplier should have filed his GST returns (GSTR 1), else the buyer won't be able to claim ITC. The details of the registered buyer entered by the supplier should match with the information provided by the buyer. [16(2)(d)]

• To claim the ITC, the buyer should pay the supplier within 180 days from date of issuing invoice. On failure, the credit amount gets added to the buyer's output tax liability. This detail must be furnished in GSTR 2 in the month immediately following to such 180 days, where interest is payable @ 18% p.a. from the date of availing credit till the date of making payment to the supplier. In case of partial payment, the reversal is proportionate to the amount not paid to the supplier. [Sec 16(2) Provision 2]

• When goods are received in lots / instalments, ITC can be claimed only upon receiving the last lot / instalment.

• ITC is not allowed if Depreciation is claimed on GST. Depreciation on the tax component can be claimed either under Income Tax Act or GST, not both.

Who cannot claim ITC?

The below suppliers cannot claim ITC, but is subject to certain exceptions. So, please read carefully.

1. Motor Vehicles and Conveyance: 

Motors vehicles having a seating capacity less than 13 (including driver) used for transportation of passengers cannot avail ITC. 

However still, ITC can be availed on purchase of motor vehicles / vessels / aircrafts upon following conditions:

a. Dealer of vehicles: Where a person is supplying such motor car in course or furtherance of business.

Eg. Mitoshi Auto Dealers purchased an SUV for Rs. 30 Lakhs plus GST Rs. 8,40,000/-. The car was sold in the market for Rs. 50 Lakhs collecting GST Rs. 14 Lakhs. Being a dealer, Rs. 8,40,000/- paid as GST can be claimed as ITC and net GST payable will be (14,00,000 - 8,40,000) Rs. 5,60,000/-.

b. Transportation of Passengers: Where purchase of motor vehicle / vessel / aircraft is made to provide transportation services.

Eg. Diary Travels Ltd. purchased a 25 seater bus for taking people for tours. Here, ITC on this purchase of bus can be claimed.

c. Providing training on driving, flying, navigating: Where purchase of motor car / aircraft / vessel is made for providing driving / flying / navigating training to public.

Eg. Maharana Driving School purchased a motor car to provide driving training to students who wish to learn driving. Here, the driving school can claim the ITC on such purchase.

d. Transportation of goods: Where purchase of motor vehicle / vessel / aircraft is made for transporting goods from one place to another.

2. Food, Beverages, Outdoor Catering, etc.

ITC is not available on the supply of Food, Beverages, Outdoor Catering, Beauty Treatment, Health Services and Cosmetic and Plastic Surgery. But ITC can be claimed by the buyer only when the category of inward and outward supply is same. 

Example, A corporate purchasing meal box for it's employees on account of party will not be eligible for ITC. But the same corporate availing outdoor catering services for business events or purchasing meal box for further supply becomes eligible for claiming ITC.

3. General Insurance, Servicing, Repairs and Maintenance

ITC is not available on general insurance, servicing and repairs except for the cases mentioned in point 1 (a), (b), (c) and (d) above. However, 

• Insurance received by a person engaged in manufacturing of motor vehicles / vessels / aircrafts can avail ITC.

• Insurance received by a person  engaged in supply of general insurance services for motor vehicles / vessels / aircrafts can avail ITC.

4. Supply of membership service in Club, Fitness Centre, Gym, etc.

GST paid on membership or subscription in a club, gym or fitness center cannot be availed as ITC. Example, an employee of company purchased a monthly subscription for gym training which was pad by his company. GST paid by the company cannot be availed for ITC. 

5. Rent a cab, Life Insurance and Health Insurance

GST paid on services like rent a cab, life insurance and health insurance cannot be availed as ITC. However, ITC can be availed in cases of:

• Any services made obligatory by the Government of India for an employer to provide to its employee.

• If the category is same for inward and outward supply or is a part of mixed or composite supply.

• Leasing, renting or hiring of motor vehicles, vessels or aircrafts with exceptions mentioned in point 1 (a), (b), (c) and (d) above.

6. Travel Benefits to Employees

ITC cannot be availed on any travel expenses or benefits extended to the employees favoring vacation or leave or family trip. 

However, ITC can be be claimed in case of business trips.

7. Works Contract

ITC cannot be availed for works contract. ITC for the construction of an immovable property cannot be claimed, except where the input service is used for further work contract services. 

Lodha Builders is constructing an immovable property in Mumbai. Here, they cannot claim ITC on this works contract. But if Lodha Builders appoints Sriram Contractors for a portion of the works contract, then Lodha Builders can claim ITC on the GST charged by Sriram Contractors. 

8. Construction of an immovable property on own account

ITC cannot be availed on construction of an immovable property for self, even if the property is to be used by the builder. However, ITC can be claimed for construction of plant or machinery. GST paid on inputs used for manufacturing a plant or machinery for self purpose can be claimed as ITC.

Example 1: Jindal Steel Industries constructs an office building for its headquarters in Mumbai. Here, ITC cannot be claimed on the materials.

Example 2: Jindal Steel Industries also constructs a blast furnace for manufacturing of steel. ITC can be claimed on the materials used to manufacture the plant.

9. Dealers registered under Composition Scheme

Dealers registered under Composition Scheme cannot avail ITC on their inward purchases. 

Example: Kinora Ltd (regd under Composition Scheme) purchased plastic for manufacturing mugs and glasses. Here, ITC cannot be claimed on purchase of plastic.

10. Non - Residents

ITC cannot be availed on goods / services received by a non-resident taxable person. However, a non - resident can avail ITC only on imported goods. 

11. Personal Use

ITC is not available on goods / services used for personal purposes and not for business purposes. 

12. Free samples and destroyed goods

ITC is not available if the purchased good is lost, stolen, destroyed, written off or given off as gift or free samples. Gifts to employees is exempted from GST upto a value of Rs 50,000 per employee.

13. Restaurants

As per Notification No. 46/2017-Central Tax (Rate), dated 14th November 2017, standalone restaurants will charge only 5% GST but cannot enjoy any ITC on their inputs. However, restaurants as part of hotels with room tariffs exceeding Rs. 7,500 continue to pay 18% GST and enjoy ITC. 

Example: Gurukripa Restaurant charges 5% GST but cannot claim any ITC. 

Example: Hotel Sahara Star's Namak restaurant in Mumbai is a part of Hotel Sahara Star and hence, it will charge 18% GST and claim ITC.